Dollar racks up worst quarter in 7 years

The dollar was on course for its worst quarter in seven years on Friday, recovering only marginally against some of its major peers after a week of hawkish central bank jawboning on inflation that has shaken currency markets.

The greenback gained around 0.3 percent against the euro EUR=EBS in morning trade in Europe, but was still down more than 8 percent on the quarter and 2 percent this week alone. Compared with Thursday's US close against the basket of currencies that measures its broader strength it was steady. But it fell 0.2 percent against the yen as the Japanese currency recovered from its own losses this week.

The shift this week to price in rate rises in the months ahead by a number of central banks outside of the US Federal Reserve has left both the dollar and the yen exposed, but a number of analysts wonder if the move has been overdone.

"There has been a concerted effort to show there is two-way risk over the next six months, but that is it: two-way," said ING strategist Viraj Patel.

"FX volatility was pretty low going into this so any small change in the language has an amplified effect and there is an argument that things have overshot."

Data and several policy meetings over the next fortnight will be crucial, with Canadian releases a focus on Friday.

Helped by a recovery in oil, the Canadian dollar has pulled back to less than C$1.30 to its U.S. counterpart for the first time since January as investors priced in a 70 percent chance of a rise in rates on July 12.

"Odds for a 2017 BoC hike have ramped up considerably in recent days and this has been a major prop for the Loonie," said LMAX Exchange analyst Joel Kruger.

"This week’s healthy recovery in (oil) has provided another excuse to pile into Canadian Dollar longs. There is every reason to expect another active session today."

As well as GDP data on Friday, Canadian banks including RBC pointed to the need for the Bank of Canada's Business Survey to support the positive rhetoric of officials in the past fortnight if the Canadian dollar was to hold onto its gains.

Sterling has also breached $1.30 this week GBP= with a hike in interest rates by December now 70 percent priced in. <0#FSS:> It was pushed back below that level by a quarterly rise in Britain's huge current account deficit on Friday.

While the deficit was lower than consensus forecasts, it pointed to the risk that sterling will have to stay low, or go lower, to rebalance the economy as it heads into the uncertainty generated by the decision to leave the European Union.

"This data release adds extra impetus to the debate between the structural sterling bears and the cyclical sterling bulls," HSBC analysts said in a note to clients.

"A wide current account deficit reinforces the argument that further GBP weakness is needed on a structural basis. We believe GBP is structural and that the fall in GBP is necessary."