The dollar rebounded broadly on Friday, but was still set for its biggest weekly percentage drop in almost a quarter of a century as dust settled from the Federal Reserves plans to buy long-term government debt. The euro reversed earlier gains with sentiment undermined slightly by uncertainty over a plan to rescue weaker eurozone members, falling below $1.36.
But despite hefty profit-taking on the dollars losses, the single currency was still on track for its biggest-ever weekly percentage gain. The US Federal Reserve shook markets to the core on Wednesday with a decision to buy $300 billion of longer-term government debt.
The move has fanned concerns that a vast expansion to the Feds balance sheet beyond the current $2 trillion means more and more of the US currency will be created, giving a huge boost to the supply of dollars. While it might be premature to call time on the dollars spectacular risk-aversion and funding induced rally, several analysts said the Feds move could well prove to be a turning point.
"Were seeing broad-based dollar weakness and we cant say its unjustified particularly... as the dust settles around the Feds announcement," said Phyllis Papadavid, FX strategist at SG in London. "Were in a situation where not all central banks are going to announce purchases of government securities," she added.
By 1200 GMT, the dollar was up 0.5 percent on the day at 83.543. The greenback has fallen roughly 4.7 percent against the basket of currencies this week, heading for its biggest weekly decline since 1985. A fall of 5.2 percent at the close later on Friday would also make this weeks dollar plunge the biggest since 1973 when the Bretton Woods system of fixed exchange rates was finally abandoned.
The euro fell 0.5 percent to $1.3590, having climbed to a peak of $1.3737 on Thursday, its highest since early January. But the common currency was up more than 5 percent from last Fridays $1.2922 close, on course for the biggest increase since its inception in 1999.
A senior German lawmaker said earlier that eurozone countries had agreed a rescue plan to prevent members of the currency bloc going bankrupt. The European Central Bank said comments the ECB has a reserve fund to help eurozone states were untrue.
"There is an element of uncertainty around what is maybe going to be put in place weighing on the currency. It could be that the market is waiting on concrete details on the plan, but euro strength will be a theme," SGs Papadavid said. Profit-taking helped also helped lift the dollar 1.1 percent against the yen to 95.50 yen.
This weeks dollar fall slowed after US stocks fell on Thursday on concerns that the Feds actions may be too costly. Investors were unsettled by the implications of the central banks actions, fearing the moves could stir up inflation in the long term.