Euro bounces on hawkish ECB signals, dollar lower

By Kevin Buckland and Alun John

TOKYO/LONDON (Reuters) – The euro jumped to a more than three-week high against the dollar on Monday as European Central Bank officials backed further aggressive monetary tightening and the greenback eased against most majors except the Japanese yen.

The European common currency rose 1.45% to $1.0198, its highest level since Aug. 17, and well above last week’s 20-year low of $0.9862.

“Positions are quite stretched, everyone and their dog has made a lot of dollars, and we had (the ECB’s) comments over the weekend, which are very aggressive and fed into this perception that maybe the market is overextended,” Jane Foley said. , head of FX. strategy at Rabobank.

Bundesbank President Joachim Nagel told German radio at the weekend that if the consumer price picture did not change “further clear steps must follow”.

In addition, ECB policymakers see growing risks that they will need to raise their key interest rate to 2 percent or more to contain record inflation in the euro zone, sources told Reuters.

Foley said the possibility of weaker US inflation data on Tuesday was also pushing investors away from the safe-haven dollar, although that was likely just a pocket of profit-taking.

“Since the market is afraid to take significant risk on high-risk currencies, the dollar will be flat for another six months or so,” he said.

The euro’s strength was also seen against the pound, rising as high as 87.22 pence on Monday, its highest level since February 2021.

The dollar’s weakness on the day meant sterling rose about 1% against the greenback to $1.1695, its highest level this month, marking a slight recovery from last week’s 37-year low.

The dollar index, which measures the currency against six major bonds, fell 1 percent to 107.8, the lowest level in two weeks and below a two-decade high of 110.79 reached on Wednesday.

Investors are cautious ahead of the US CPI report, which analysts at the Commonwealth Bank of Australia say could determine whether the US Federal Reserve raises interest rates by 50 basis points or 75 basis points at its meeting next week.

Fed officials continued their hawkish rhetoric on Friday, ahead of a blackout period leading up to the central bank’s deliberations.

Fed Governor Christopher Waller said he supports “a significant hike at our next meeting,” while St. Louis Fed President Louis, James Bullard reiterated his call for a 75 basis point hike.

The dollar was flat against the rate-sensitive Japanese yen at 142.66 yen, down from a 24-year high of 144.99 hit last week.

Japanese officials over the weekend hinted at intervention to stop the currency weakening further. A senior government official said in an interview on local television that the government should take measures as needed to deal with the yen’s excessive fall.

At the same time, the Bank of Japan is unlikely to step in to support the currency with higher interest rates, sources told Reuters.

The Australian dollar, which typically performs well when investors are bullish on growth, was 0.5% higher at $0.6882 and similarly-moving bitcoin rose 1.9% to about $22,260, the higher than mid-August.

(Editing by Shri Navaratnam, Jacqueline Wong and Sam Holmes)

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