NEW YORK: The US dollar soared nearly 2.0 percent against the euro on Thursday as concerns about a global economic slowdown, reflected in a slump in commodity markets, prompted investors to flee risky assets and high-yielding currencies and seek refuge in the greenback.
The slide in commodities also hurt currencies from commodity exporting countries such as Australia and Canada. The Australian dollar fell 1.4 percent to US$1.0568 after rising above $1.10 earlier this week, its highest level in nearly 30 years.
The plunge in the euro, which had its worst day against the US dollar since August last year, was triggered by comments from European Central Bank President Jean-Claude Trichet suggesting that euro zone interest rates were unlikely to rise next month.
But the impact of Trichet's comments were overshadowed by the drop in the prices of energy and metals prices after more weak US economic data.
‘It is clear to us that the market is caught with offside positioning and facing a barrage of growth and risk negative data,’ said Steven Englander, head of G10 foreign exchange strategy, at CitiFX in New York.
‘The major question for next week is whether this is just a position squeeze, in which case a round or two of reserve manager buying will put risk back on, or whether investors significantly underestimated the fragility of the G10 and possibly emerging market countries to tightening and commodity price increases.’
In late New York trading, the euro fell 2.0 percent to $1.4526, well off Wednesday's 17-month high of $1.49404.
After falling as low as $1.45100 on trading platform EBS, the next key level for the euro would be $1.44559, analysts said. That corresponds to the 61.8 percent Fibonacci retracement of the euro's recent rally from a $1.41560 low on April 18 to the 17-month peak of $1.49404 scaled on Wednesday.
ECB RATE RISE POSTPONED
The euro's fall came after the ECB left its benchmark interest rate unchanged as expected at 1.25 percent, but was triggered by Trichet's comments in which he failed to use the key words ‘strong vigilance’ in his comments on inflation, suggesting a further ECB rate rise would not happen in June.
In the past, the ECB regularly used the phrase to signal a rate hike was only a month away.
‘Going into the meeting, the market was split on the issue of whether the next hike would be in June or July, but Trichet quickly made it clear that the ECB will not hike at the June meeting,’ said Frank Hansen, senior economist at Danske Bank in Copenhagen.
Before the ECB meeting, the markets had priced a 40 percent probability of a June hike. The probability has now declined to almost zero, while the implied probability of a July rate increase was now at 75 percent, analysts said.
Further out on the yield curve, interest rate rise expectations were reduced more aggressively. The euro zone's refinancing rate is now expected to hit 2.0 percent next March -- a rate that before the meeting was expected to be reached late this year.
Reflecting sharp moves in the spot market, the implied volatility on one-month euro/dollar options hit a roughly six-week high at 11.60 percent on Thursday, according to Reuters data, from 10.90 percent on Wednesday.
Against the yen, the euro fell 2.5 percent to 116.49 yen, its poorest showing since June.
Other euro-linked assets also fell. The CurrencyShares Euro Trust was down more than 2.0 percent at $144.69.
Overall option volume on this fund was 2.7 times the average daily levels with about 40,000 puts and 3,096 calls traded near the close on Thursday, according to options analytics firm Trade Alert.
Still, analysts believed the euro's decline was just a respite and the currency should make its way to $1.50 in fairly short order as part of an unwinding of safe-haven flows into the US dollar during the financial crisis of 2008.
Market participants still expect the ECB to raise rates more rapidly than the Federal Reserve, which is seen holding US borrowing costs at record lows until at least mid-2012.
Against the yen, the US dollar fell below 80 yen for the first time since March 18, the day central banks intervened to weaken the Japanese currency after it hit a record high.
The strengthening of the yen prompted some traders to warn a second round of intervention could be on the cards.
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