Dollar falls, euro gains in wake of hawkish ECB hike; stocks rally

Summary

• US stocks up sharply in early trading
• Euro gains, dollar falls
• US yield curve inverts further

The dollar fell to a one-week low on Friday as this week's large interest rate hike by the European Central Bank boosted the euro, while global stock markets rose sharply with tech and growth shares.

The euro rose back above parity to a three-week high against the dollar, a day after the ECB raised rates by a record 75 basis points on Thursday and signalled further hikes to fight inflation, even as the bloc's economy eyed a winter recession.

The dollar index dropped as low as 108.35 and was last down 0.5% at 108.96 , pulling back after recent sharp gains. The dollar index was on pace for its first weekly decline in four weeks.

"Markets are getting a little nervous about levels, really historic levels, so the market decided not to push the dollar's strength at this juncture and lightened up positions," said Greg Anderson, global head of FX strategy at BMO Capital Markets in New York.

The euro jumped as much as 1.2% to hit a three-week high of $1.0114 .

On Wall Street, all three major indexes were up more than 1%, with megacap technology and growth shares leading the way higher.

The Dow Jones Industrial Average rose 346.94 points, or 1.09%, to 32,121.46; the S&P 500 gained 52.46 points, or 1.31%, to 4,058.64; and the Nasdaq Composite added 209.81 points, or 1.77%, to 12,071.93.

"We got oversold in the last couple of weeks in August and this is a relief rally," said Dennis Dick, head of markets structure at Triple D Trading. 

The pan-European STOXX 600 index rose 1.69% and MSCI's gauge of stocks across the globe gained 1.60%.

In Treasuries, the yield curve inverted further as investors waited on key inflation data for August due on Tuesday.

Yields rose on Thursday after Federal Reserve Chairman Jerome Powell reiterated his stance that the US central bank's priority is to tackle soaring price pressures.

The yield curve between two-year and 10-year notes flattened by 3 basis points to minus 23 basis points. The inversion is seen as a possible indicator that a recession is likely in the next one to two years.

Benchmark 10-year note yields were last 3.29%. They have risen from a four-month low of 2.516% on Aug. 2, but are holding below the 11-year high of 3.498% reached on 14 June.

Germany's two-year bond yield hit its highest since 2011 for a second day before trimming gains to trade flat at 1.316%.

US rate futures have priced in an 87% chance the Fed will hike by another 75 basis points at this month's meeting, which would increase the Fed funds rate to a 3.0%-to-3.25% range. That probability is up from a day ago.

In other currencies, sterling was last trading at $1.158, up 0.70% on the day.

The death of Queen Elizabeth on Thursday has heightened an uncertain state of affairs in Britain after the pound hit a 35-year low on the dollar earlier this week.

The Bank of England postponed its September interest rate decision for a week, to Sept. 22, following Elizabeth's death.

Cryptocurrencies advanced as well, with bitcoin up nearly 9% at $21,033.

US crude recently rose 3.18% to $86.20 per barrel and Brent was at $91.86, up 3.04% on the day.

Spot gold added 0.4% to $1,713.30 an ounce.