SYDNEY The dollar was nursing heavy losses in Asia on Friday after wild swings overnight left dealers struggling to find a pattern amid all the noise, setting the scene for a defensive session into the weekend.
There was a complete breakdown of correlations between markets, with the dollar reversing course, stocks sliding, Treasury yields at two-year peaks and gold screaming higher.
At one point, the greenback reached a near two-week high of $1.3205 on the euro and 98.64 against the yen. But then it abruptly crashed to as low as $1.3363 and 97.00. The dollar also turned tail on sterling and the Swiss franc.
"There was no rhyme or reason to the move," said one baffled trader at an Australian bank in Sydney. "It looks like gold went first, and then the dollar cratered. Whether that was linked is hard to say. And why is a mystery."
"But the trading range was so wide that it took out stops and orders on both sides of the market. People will only trade today if they have to."
Gold was all the way up at $1,366.69 on Friday, trading at two-month highs after being as low as $1,318.81 at one stage on Thursday. The break of major resistance at $1,350 may have triggered selling in the dollar, the dealer said.
Whatever the cause, the euro had settled at $1.3347 on Friday and faced stiff resistance in the $1.3390/3400 area. The dollar was down at 97.24 yen, having found support in the 97.00/20 zone.
The dollar index .DXY was off at 81.170, after toppling from a peak of 81.943 on Thursday.
The dollar had initially rallied early Thursday on upbeat U.S. jobless claims data, but stalled when data on industrial output and manufacturing disappointed. <TOP/CEN>
Some dealers singled out U.S. data on capital flows, which showed a record $40 billion liquidation of Treasuries by foreign private investors in June. Also sold was $9 billion of agency debt, $26 billion in equities and $7 billion of corporate paper.
The selling was led by China, Japan and Hong Kong, presumably in reaction to the Federal Reserve's suggestion that it might start to taper its asset buying before year-end.
"The data highlights the conflicting forces on cross-border flows from the expected change in U.S. monetary policy related to tapering," said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.
"We are still some way off the point where tighter U.S. monetary policy is fully priced such that foreign flows are attracted into fixed-income instruments or risky assets like equities."
The pressure on Treasuries was evident on Thursday as yields on 10-year notes rose to 2.77 percent after a big bulwark at 2.75 percent finally gave way.
Among the gainers from all this was sterling, which shot up 0.9 percent on the dollar to $1.5640 as strong retail sales figures sent gilt yields to a two-year peak.
A run of solid data has seen money markets steadily bring forward the day when the Bank of England might start lifting interest rates.
Sterling overnight interbank average rates (SONIA) - the very short-term interest rates that form the basis of lending costs to the wider economy - are pricing in a first move in 18 months, compared with two years on Wednesday.
(Editing by John Mair)