US dollar mauled as euro leads vicious short squeeze

The U.S. dollar was broadly lower on Wednesday as hopes for progress in Greek debt talks and a huge spike in European yields combined to give the euro its biggest gain in three months. -- PHOTO: BLOOMBERG
The U.S. dollar was broadly lower on Wednesday as hopes for progress in Greek debt talks and a huge spike in European yields combined to give the euro its biggest gain in three months. -- PHOTO: BLOOMBERG

SYDNEY (Reuters) - The U.S. dollar was broadly lower on Wednesday as hopes for progress in Greek debt talks and a huge spike in European yields combined to give the euro its biggest gain in three months.

The dollar index, which measures it against a basket of six major currencies, was down at 95.943 having shed 1.5 per cent on Tuesday in its biggest one-day drop since July 2013.

The euro was enjoying the view at US$1.01150, having climbed 2 per cent overnight, while the dollar lapsed back to 124.08 yen and away from a 12-1/2-year peak of 125.070.

CitiFX head G10 strategist, Steven Englander, said the violence of the shift reflected just how much speculators had been long of dollars and short of euros. "Today's EUR move started as a rates move and looks now to be a position unwind. We estimate that a third of the EURUSD move is driven by the change in rates, and 67 per cent by positioning unwinds."

The initial catalyst was EU data showing a surprisingly large increase in headline and core inflation which suggested the European Central Bank's latest easing campaign was gaining traction. German 10-year Bund yields surged 16 basis points to 0.68 per cent, the biggest jump in about three years, while Spanish, Italian and Portuguese yields hit 2015 highs.

The central bank holds a policy meeting later Wednesday and will likely reaffirm its commitment to the trillion euro asset purchase programme.

The euro got another leg up when the ECB, the European Commission and the International Monetary Fund agreed on the terms of a cash-for-reform deal to be put to Greece in a bid to conclude four months of debt stalemate.

It was far from clear if the leftist government of Prime Minister Alexis Tsipras would accept the plan, but the market took it as an encouraging step forward.

Dealers said the speed and size of the euro rally argued for consolidation in the very term, while the technical background looked better after a break of the 20-day moving average at US$1.1132. The next major chart target was US$1.1210/20 and a breach there could trigger a move to the US$1.1325/40 zone.

Still, there is a host of U.S. economic data yet to come this week, including the payrolls report on Friday, and any signs of strength could revive dollar bulls.

For now, the dollar's retreat has lifted commodities and related currencies.

The Australian dollar shot to US$0.7762, having jumped 2.2 per cent on Tuesday, with the New Zealand dollar not far behind at US$0.7175.

The Australian currency faces a hurdle in the form of gross domestic product data later in the session, where an outcome of less than the expected 0.7 per cent gain could cause a pullback.