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Dollar eases, but remains near 2-decade highs

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Dollar dips, but on track for third-straight monthly gain By Reuters

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Economy 3 hours ago (Aug 31, 2022 16:17)

© Reuters. FILE PHOTO: U.S. One dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration

By John McCrank

New York (Reuters) – The dollar dipped against a basket of peer currencies on Wednesday, but was on track for its third-straight monthly rise, as traders brace for more oversized interest rate hikes from the U.S. Federal Reserve.

The dollar index, which measures the greenback against a basket of six currencies, was last down 0.184% at 108.56, after earlier having come within a whisker of Monday’s two-decade peak of 109.48.

The index is on track for a rise of over 3% in August, and its highest end-of-month closing level since May 2002.

Fed officials on Tuesday reiterated their support for further rate hikes to quell inflation, with New York Fed chief John Williams telling the Wall Street Journal that it will “take some time” before interest rates would be cut.

His comments followed a hawkish speech from Fed Chair Jerome Powell at the Jackson Hole central banking symposium in Wyoming late last week that shut the door on the idea that the Fed might pivot and begin lowering rates by mid-2023, which prompted a wave of dollar strength.

Traders are now pricing in about a 70% chance of a 75 basis points Fed rate hike next month, according to data from Refinitiv.

“All of these bets that came in late July about the Fed potentially pivoting have to unwind, and so that’s meant we’ve got to buy dollars again because the Fed is not done,” said Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull.

“The only real change we’ve had now is that we have an ECB (European Central Bank) that looks like it’s desperate to catch up and so the rate spreads are helping euro-dollar kind hang in there,” he said.

The euro rose back above parity with the dollar on Wednesday, but was on track for its third consecutive monthly drop as a burgeoning energy crisis adds to recession fears, while the ECB pushes ahead with rate hikes.

On Wednesday, Russia halted gas supplies from the Nord Stream 1 pipeline, intensifying an economic battle between Moscow and Brussels and raising the prospects of a recession and energy rationing in some of the world’s richest countries.

Fears that gas flows through the pipeline will not resume after the planned maintenance comes to an end on Saturday have kept traders on edge.

“The narrative that has helped the euro at the start of the week, which is an improvement in the gas story, is fading now, which we think will put a cap on euro-dollar,” said ING currency strategist Francesco Pesole.

“We’ll know in the next few days whether the resumption of flows at the end of the maintenance period will go smoothly or not.”

The euro was last up 0.35% at $1.005.

Inflation in the euro zone rose to another record in August, beating expectations and solidifying the case for further big European Central Bank (ECB) rate hikes.

A growing number of ECB officials have been calling for oversized rate hikes to combat surging inflation, which could exceed 10% in the coming months.

Money markets are fully pricing in a 50 basis points rate hike from the ECB, with a greater than 60% chance of a larger 75 basis points hike, according to Refinitiv data.

Elsewhere, Norway’s krone fell over 1% against the dollar and euro after the country’s central bank said it would buy more foreign currency for its sovereign wealth fund.

It was last down 1.29% against the greenback at 9.9663 hitting its weakest level in a month.

Bitcoin was up 1.45%, just above the $20,000 level.

Dollar dips, but on track for third-straight monthly gain

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