Title: Dollar Drops Sharply; Hawkish ECB Boosts Euro

Sep 09, 2022 03:14AM ET

By: AnalysisWatch

The U.S. dollar fell sharply in early European trading on Friday after hawkish comments from the European Central Bank prompted traders to reassess expectations for interest rate hikes around the world.

At 03:15 GMT, the dollar index, which tracks the greenback against a basket of six other currencies, was trading 1.1% lower at 108.585, heading for a weekly decline of 0.6 after hitting a 20-year high of 110.79 earlier in the week.

Fed Chairman Jerome Powell reiterated on Thursday that the central bank is "firmly committed" to controlling inflation, which largely reinforced the market's belief that the U.S. central bank will raise rates by 75 basis points at its next meeting in less than two weeks.

However, his comments were largely expected and it was the ECB's hawkish stance that changed direction.

The European Central Bank on Thursday raised interest rates by an unprecedented 75 basis points and pledged further increases, prioritizing fighting inflation even as the bloc is likely headed for a winter recession.

That hawkish stance sparked a sharp bout of profit-taking after a long dollar rally, with some traders scrambling to offset positions as it became clear that central banks other than the Fed were now aggressively raising rates to tame inflation.

The EUR/USD currency pair rose 1% to 1.0091, climbing firmly back to parity after hitting a 20-year low of 0.9863 earlier in the week.

GBP/USD rose 1% to 1.1616, heading for its best daily jump in a month and recovering from a slight dip following the death of Queen Elizabeth II.