Market News

(Bloomberg) -- Currency traders buffeted by relentless dollar strength this week caught a break Friday after a hawkish European Central Bank cooled demand for the world’s pre-eminent haven asset. 

The Bloomberg Dollar Spot Index tumbled as much as 0.7% in Asia trading after surging to the highest on record this week. The drop set off a jump in Group-of-10 and emerging-market currencies.

The euro was trading above parity after the ECB raised rates by a jumbo-sized 75 basis points and even the embattled yen, which slid to a new 24-year low this week, rallied. 

The dollar’s drop offers a reprieve to currencies which have been pummeled by its recent strength. The greenback’s surge had rattled policy makers and prompted authorities in South Korea and India to intervene to curb the risk of capital outflows.

“There is a degree of dollar bids having been dominant for a while, and some are squaring up positions as other central banks other than the Fed hike aggressively to tame inflation,” said Patrick Bennett, strategist at Canadian Imperial Bank of Commerce in Hong Kong. “But this move is not guaranteed to last -- the dollar will remain dominant on risk aversion tied to slower global growth activity.”

The world’s reserve currency has been on a tear this year as expectations of higher-for-longer US interest rates and fears of a global recession send investors flocking to the greenback. Bloomberg’s dollar gauge has gained almost 11% this year. 

The tide turned against the greenback on Friday as sentiment toward the euro recovered after the ECB’s jumbo-sized hike left the door open to another big move in October. The dollar’s losses may also have been compounded by expectations that a report due next week could show US inflation eased in August, according to Kengo Suzuki, chief market strategist at Mizuho Bank in Tokyo.

The dollar’s decline spurred gains in emerging-market currencies, with the Hungarian forint and the Polish zloty advancing at least 0.8%. In Asia, the Philippine peso rose 0.6% while Indonesia’s rupiah climbed 0.3%.

“With FOMC Chair Jerome Powell not adding to the Fed’s hawkishness, the ECB meeting the market’s expectations and Japan’s MoF warning of intervention against further yen weakness, the dollar has lost reasons for the markets to drive it higher for now,” said David Forrester, strategist at Credit Agricole CIB in Hong Kong.

(Updates throughout)