Dollar tumbles as investors re-evaluate policy divergence

dollar The dollar fell sharply on Wednesday as speculators betting on euro weakness were hit by comments from European Central Bank policy maker Ewald Nowotny that added doubts about expected monetary policy divergence between the United States and E

The dollar fell sharply on Wednesday as speculators betting on euro weakness were hit by comments from European Central Bank policy maker Ewald Nowotny that added doubts about expected monetary policy divergence between the United States and Europe.

The euro and yen both hit one-month highs versus the dollar as traders reversed course on the bullish trend that pushed the greenback to multi-month highs against both currencies.

It was the weakest the dollar has been against the two since a surprisingly robust US jobs report on November 6th pushed it broadly higher.

Nowotny rattled trading after he said markets had overestimated what action the European Central Bank (ECB) would take at its December 3rd policy meeting, calling it a "massive failing of market analysts."

The ECB announced last week that it would cut its already negative deposit rate further, but said it would not add to its quantitative easing programme, disappointing investors. The move sent the euro up 3.1 % on the day, its biggest one-day percentage climb since March 2009.

Analysts attributed the violent nature of the move to the fact that investors had big bets on further gains in the dollar that were interrupted by the ECB's action. Analysts said that some of Wednesday's selling in the dollar was due to further short-euro bets being cleared out of the market.

"Nowotny really started things off today when in a market that's looking for information he was really the sole voice," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.

The euro increased 1.2 %, last trading at $1.1025, and sterling added 1.18 % to $1.5182. The dollar fell 1.45 % against the yen , to 121.14 yen.

Many investors were holding positions in expectation of further stimulus in the euro zone that would contrast with a rate increase from the US. Federal Reserve, Borthwick said. When the ECB declined to add more quantitative easing, it took out one half of the strategy, he added.

Since then, the dollar has recovered, in anticipation that the recent trend of dollar strength would reassert itself, but Nowotny's comments reinforced the idea that additional stimulus may not be on its way, Borthwick added.

"People thought that the ECB would take a step back and try to talk down the rhetoric, but instead you had Nowotny come out today and say, 'You know what? The ECB is right,'" he said.

The dollar also tumbled more than 1 % against the Swiss franc and Swedish and Norwegian crowns . The Norwegian crown had fallen to a 13-year low against the dollar on Tuesday as oil prices dropped.