SYDNEY The dollar slumped in thin early Asian trade on Thursday after dovish comments from Ben Bernanke forced markets to cut bullish bets on the greenback as they reassessed when the U.S. central bank was likely to start withdrawing stimulus.
The dollar index swiftly retreated from a three-year peak, dropping 2.7 percent -- a magnitude not seen since 2008-2009 at the height of the global financial crisis.
Investors dumped the dollar after Federal Reserve Chairman Bernanke said the U.S. central bank would continue to pursue an accommodative monetary policy as inflation remained low and the unemployment rate might be understating the weakness of the labour market.
That saw the euro roar to a three-week high of $1.3208 at one stage, up more than 3 percent from Wednesday's low of $1.2765. It easily spiked above $1.3010, the 38.2 percent retracement of its June-July fall, then $1.3167, the 61.8 percent level in the past hour.
"I was pretty shocked with this sell-off this morning. Obviously, Bernanke kicked it all off, but it was a bit of a delayed reaction," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo.
"It does seem like a bit of an over-reaction. Having said that, it's a bit surprising, all of a sudden, the change in the tone of Bernanke, so it's a whole new world all of a sudden."
The dollar also fell against the yen, dropping to a two-week low of 98.66. Traders said stop-loss selling kicked in when the dollar broke below 100 yen, further exaggerating the move. Earlier in the week, the greenback rose as high as 101.53.
Treasury note futures climbed over a point, implying a sharp drop in yields once the cash market gets underway.
The yen's immediate focus is the outcome of the Bank of Japan policy meeting due 0330-0500 GMT, followed by a media briefing by the BOJ Governor at 0630 GMT. The market expects no new stimulus from the Japanese central bank and expects it to present a more upbeat view of the economy.
Commodity currencies also jumped against the dollar, with the Australian dollar climbing as high as $0.9300 to pull further away from a 34-month trough of $0.9036 plumbed just last week.
The immediate focus for the Aussie is the domestic employment report at 0130 GMT. Forecasts centre on a fall of 2,500 jobs and the jobless rate to edge up to 5.6 percent.
Any disappointment in the data could give Aussie dollar bears a fresh excuse to sell.
(Additional reporting by Lisa Twaronite; Editing by John Mair)