Dollar set for weekly fall as euro bounces on ECB hike

By Iain Withers

LONDON (Reuters) - The dollar was on track for its first weekly fall in four on Friday, as a hawkish rate hike from the European Central Bank lifted the euro and investors looked to U.S. inflation data early next week.

The dollar lost ground across the board, with the dollar index - which tracks the greenback against six major peers - falling 1% on the day, last at 108.400. It is set for a 1.1% weekly fall.

Among the big gainers was the euro, which leapt 1.1% to a three-week high of $1.01105, a day after the ECB raised its key interest rate by an unprecedented 75 basis points (bps).

European Union energy ministers are meeting on Friday to seek agreement on ways to shield citizens from sky-high energy prices and prevent power utilities from collapsing as Russia has gradually turned off gas supplies to Europe in the standoff over Ukraine.

"This is clearly an interest rate differential story," said Samy Chaar, chief economist at Lombard Odier.

"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.

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

Markets are pricing in an 87% chance of the U.S. Federal Reserve following suit 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 benefitted from a pick up in market sentiment to end the week, reflected in gains across European stock markets.

Sterling gained 1.2% to $1.16330, after a modest dip the previous day after the death of Queen Elizabeth. Britain's King Charles is set to address the nation later on Friday.

The Japanese yen was headed for its best daily jump in a month, up 1.4% to 142.05 yen per dollar, as it clawed away from recent 24-year lows.

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

The Australian dollar was on track for its best daily gain in three months, up 1.8% versus the dollar to $0.68730, also rebounding from deep lows.

Even beaten down cryptocurrencies advanced at the dollar's expense, with bitcoin back above $20,000 and up 7%.