Dollar retreats as investors square up positions after steep gains

By Gertrude Chavez-Dreyfuss and Iain Withers

NEW YORK/LONDON (Reuters) -The dollar fell to a more than one-week low on Friday as investors consolidated gains after a sharp rise against most currencies, ahead of a U.S. inflation report that could determine the size of the Federal Reserve's rate hike at this month's policy meeting.

On the week, the dollar index, which tracks the greenback's value against six major peers, was on pace for its first weekly fall in four on Friday.

"Markets are getting a little nervous about levels, really historic levels, so the market decided not to push the dollar's strength at this juncture and lightened up positions," said Greg Anderson, global head of FX strategy, at BMO Capital Markets in New York.

"Probably position-taking will be light until the FOMC (Federal Open Market Committee) meeting. The market looked at everything overnight and decided that this is a good juncture to square up and that process has brought the dollar lower. But this is not a reversal of the trend on dollar strength," he added.

The dollar index dropped as low as 108.35 and was last down 0.5% at 108.96.

Among the big gainers was the euro, which leapt as much as 1.2% to a three-week high of $1.0114, a day after the European Central Bank raised its key interest rate by an unprecedented 75 basis points (bps).

It was last up 0.5% at $1.0048.

"We have yields in Europe that continue to be well supported following the ECB, that was – as expected - hawkish through all the policy instruments. And on the other hand, U.S. yields are backing down a bit," said Samy Chaar, chief economist at Lombard Odier.

"Putting the two together, that's probably what is behind the retreat of the dollar."

Europe still faces a weak economic outlook, with sky-high energy prices squeezing consumers and businesses. European Union energy ministers were split on Friday over whether to cap Russian gas prices, as they met to work out steps to shield citizens.

U.S. rate futures are pricing in an 87% chance of the Fed following the ECB move with its own 75 bps hike this month, with fresh U.S. consumer price data next week likely to be closely watched.

Currencies perceived as riskier bets also benefited from a pick-up in market sentiment to end the week, reflected in gains across European and U.S. stock markets.

Sterling gained 0.8% to $1.1584, after a modest dip the previous day following the death of Queen Elizabeth. Britain's King Charles is set to address the nation later on Friday.

The Bank of England said on Friday it would delay its next monetary policy meeting by one week due to the period of royal mourning.

The Japanese yen was headed for its best daily jump in a month, up 1.2% at 142.34 yen per dollar, as it clawed away from recent 24-year lows.

Bank of Japan Governor Haruhiko Kuroda said on Friday rapid yen moves were undesirable after a meeting with Prime Minister Fumio Kishida.

The Australian dollar was also on track for its best daily gain in a month, up 1.5% versus the dollar to US$0.6850, also rebounding from deep lows.

Even beaten down cryptocurrencies advanced at the dollar's expense, with bitcoin up nearly 9% at $21,033.

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Currency bid prices at 10:12AM (1412 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 108.9200 109.5200 -0.54% 13.858% +109.5400 +108.3500

Euro/Dollar $1.0049 $0.9999 +0.51% -11.61% +$1.0114 +$0.9993

Dollar/Yen 142.4300 144.1100 -1.18% +23.71% +144.1000 +141.5050

Euro/Yen 143.14 144.06 -0.64% +9.84% +144.7200 +142.6500

Dollar/Swiss 0.9599 0.9704 -1.08% +5.23% +0.9702 +0.9548

Sterling/Dollar $1.1582 $1.1498 +0.76% -14.34% +$1.1647 +$1.1499

Dollar/Canadian 1.3034 1.3092 -0.44% +3.09% +1.3094 +1.2982

Aussie/Dollar $0.6846 $0.6751 +1.41% -5.81% +$0.6877 +$0.6748

Euro/Swiss 0.9647 0.9701 -0.56% -6.96% +0.9727 +0.9634

Euro/Sterling 0.8674 0.8688 -0.16% +3.26% +0.8707 +0.8670

NZ $0.6113 $0.6056 +1.01% -10.64% +$0.6152 +$0.6055

Dollar/Dollar

Dollar/Norway 9.9115 10.0530 -1.23% +12.71% +10.0410 +9.8455

Euro/Norway 9.9615 10.0394 -0.78% -0.51% +10.0551 +9.9442

Dollar/Sweden 10.6040 10.7038 -0.37% +17.59% +10.7093 +10.5194

Euro/Sweden 10.6570 10.6971 -0.37% +4.13% +10.7128 +10.6290