Dollar sags below 20-year peak as euro lifted by ECB bets

The tables turned for the two currencies as traders began ramping up bets for a super-sized 75-basis-point interest rate increase by the European Central Bank while paring the odds for one by the U.S. Federal Reserve.

“Recent days have arguably been dominated more by hawkish ECB-speak than Fedspeak,” Alvin Tan, a Singapore-based strategist at Royal Bank of Canada, wrote in a client note.

“There is obviously an active debate among the ECB council members” over the size of hike to approve on Sept. 8, Tan said.

Traders see better than 50% odds for a 75 bps move after a parade of ECB speakers at the Feds annual symposium in Jackson Hole backed the case for a big hike.

By comparison, bets for a 75 bps increase by the Fed on Sept. 21, while higher at 70%, have receded from as much as 75% on Monday.

Monthly U.S. jobs figures due on Friday will be closely watched for further clues to the interest rate outlook.

The dollar index – which measures the greenback against a basket of six currencies, with the euro the most heavily weighted – stood at 108.72 in Asian trading, after dropping back from 109.48 overnight, a level not seen since September 2002.

The euro edged 0.06% higher to $1.0003, adding to Mondays 0.32% rally, its biggest in almost three weeks.

The euro was also helped by a retreat in European gas prices after German economy minister Robert Habbeck said the country was filling gas storage facilities faster than expected.

“The euro has found some stability near parity,” said Sean Callow, a currency strategist at Westpac in Sydney.

“But the euros yields remain unappetising and the deepening gas crisis in Europe means that more aggressive ECB hikes would only deepen recession. We expect EUR/USD to print fresh 20-year lows in coming days, with 0.98 the next obvious target.”

The dollar slid 0.21% to 138.44 yen, after rising to 139 overnight for the first time since mid-July.

Sterling rose 0.08% to $1.17145, continuing its recovery from an almost 2-1/2-year low of $1.16495 reached on Monday.

The risk-sensitive Australian and New Zealand dollars retreated, though.

The Aussie slid 0.22% to $0.6887 amid a decline in commodity prices and a slump in Chinese equities, after bouncing from a six-week low of $0.6841 in the previous session.