The US dollar was on track to post its biggest daily percentage loss against the euro since March 2009 on Thursday after the European Central Bank cut its interest rate on deposits by just 10 basis points, stinging some euro short-sellers who were expecting a sharper move. The euro surged against the dollar to $1.09810, its highest level in a month, in the wake of the decision and ECB President Mario Draghi's comments at a news conference. The euro last hovered near that level at $1.09550, a 3.22 percent gain against the greenback.
Draghi said the central bank could make other moves later if needed and described the decision to reinvest principal repayments on bonds it has already bought to maintain liquidity as "very significant." The ECB's decision catalyzed a euro short squeeze, or a rapid repurchase of the currency by traders who had shorted it on expectations of a more dramatic move, analysts said.
"People were very, very short euros," said Jason Leinwand, managing director at Riverside Risk Advisors in New York. "People were looking for a bigger cut in rates out of the ECB, and they didn't get it." Coming into this week, speculators had a net short position of 175,000 contracts in the euro, according to CME data, marking the biggest short position in euros among speculators since May.
The US dollar index, which measures the greenback against a basket of six major currencies, hit 97.591, its lowest level in roughly a month, and last hovered near that level. The dollar hit a one-month low against the Swiss franc of 0.98760 franc. The dollar index was also on track for its biggest daily percentage loss since March 2009, and was last down 2.25 percent at 97.734. The dollar hit 122.300 yen, its weakest level against the Japanese currency in over a week.
The euro added to gains as the US trading session continued. The momentum was a result of traders interpreting the 10-basis-point rate cut as a sign that the ECB would be less stimulative in the future, said Steven Englander, head of G10 foreign exchange strategy at Citi in New York. "Markets are still trying to digest the implications of the ECB disappointing market expectations," Englander said. "The market is taking the message that the ECB will be less willing to ease down the road as well." Englander said comments from US Federal Reserve chair Janet Yellen on Thursday suggested that the central bank would raise interest rates at its policy meeting later this month, but added that the impact of the ECB decision overshadowed Yellen's remarks.
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