The dollar gained against the euro on Thursday after central banks said they will scale back some emergency programmes that have injected trillions of dollars into banks as financial markets stabilise. Sterling also neared a six-month low and racked up its worst one-day percentage loss since late April at current prices against the euro after BoE Governor Mervyn King told a regional British newspaper a weak pound was helping UK exporters and the economy cope with a sharp downturn.
The vast amounts of money pumped into the global economy as well as low interest rates have put pressure on the US dollar and increased its appeal for use in carry trades. In a carry trade, an investor borrows in a low interest rate currency and uses the funds to invest in higher-yielding assets in other countries.
"Any news that has to do not with the economy per se but with the dollar not being the primary funding currency for the carry trade is going to be reacted to very violently" to the upside, said John Kicklighter, currency strategist at DailyFX.com in New York.
The steps taken by several major central banks, as well as weaker-than-expected US housing data reversed the dollar's earlier softness as traders said it sparked investors to sell currencies and assets seen as higher risk in favour of the perceived safety of the US dollar.
The Federal Reserve, Bank of England, European Central Bank and Swiss National Bank simultaneously announced plans to scale back their emergency lending programs on Thursday. That comes a day after the Fed kept interest rates at a record low and signalled they would stay there for a long time. At the same time, the Fed said it would slow purchases of mortgage debt to extend the life of that program.
The euro was down 0.5 percent at $1.4650, off a session high of $1.4803 and a one-year peak of $1.4842 hit a day ago. Sterling fell 1.8 percent to $1.6049, dropping below $1.61 for the first time since July, and the euro was up 1.3 percent at 91.24 pence, a near six-month high.
More than 1,700 euro/sterling trades went through Reuters Matching in the hour after King's comments, the most in a single hour for at least three months, Reuters data showed. The dollar was little changed at 91.23 yen, though that was well off a 90.36 session low. The euro was risen 5 percent against the dollar this year. Analysts expected currencies to be a part of discussions among the Group of 20 leaders meeting in Pittsburgh.