The U.S. dollar hit a roughly one-month low against the euro on Thursday after the European Central Bank cut its interest rate on deposits by just 10 basis points, stinging some euro short-sellers who were expecting a sharper move.
The euro surged against the dollar to $1.0982, its highest level since November, after the decision and ECB President Mario Draghi's comments at a press conference. The euro was last up 3.27 percent against the dollar at $1.0954.
Draghi said the central bank could make other moves later if needed and described the decision to reinvest principal repayments on bonds it has already bought to maintain liquidity as "very significant."
The ECB's decision catalyzed a euro short squeeze, or a rapid repurchase of the currency by traders who had shorted it on expectations of a more dramatic move, analysts said.
"Huge squeeze, obviously," said Jens Nordvig, Nomura global head of FX strategy. "Expectations were just too elevated, and positions sizeable," he said in reference to bets that the euro would fall. "The psychology banking too much on Draghi 'overdelivering'."
The U.S. dollar index, which measures the greenback against a basket of six major currencies, hit 97.59, its lowest level in nearly a month, before trading at 97.94. The dollar also hit a low against the Swiss franc of 0.9875 franc.
The euro added to gains as the U.S. trading session continued. The momentum was a result of traders interpreting the 10-basis-point rate cut as a sign that the ECB would be less stimulative in the future, said Steven Englander, head of G10 foreign exchange strategy at Citi in New York.
"Markets are still trying to digest the implications of the ECB disappointing market expectations," Englander said. "The market is taking the message that the ECB will be less willing to ease down the road as well."
Englander said comments from U.S. Federal Reserve chair Janet Yellen on Thursday suggested that the central bank would raise interest rates at its policy meeting later this month, but added that the impact of the ECB decision overshadowed Yellen's remarks.
Against the , the greenback was last down 0.68 percent at 122.44 yen.
Despite the dollar's fall Thursday, Alan Ruskin said the greenback's rally wold carry on in 2016.
"I think for the next couple of years the dollar will still be very strong," the global head of foreign exchange strategy at Deutsche Bank told CNBC. He also said the euro should be in the low 90s against the dollar on the premise that the Fed tightens in December, March, and again in June.
"With three tightenings, that will take the U.S. dollar into the realms of a high-yielder in the G10 world, bizarrely enough."