On Wednesday, the US dollar declined against a basket of its peers, but it was still close to the 2-decade high that it had touched on Monday.
Traders were gearing up for yet another aggressive interest rate hike from the Federal Reserve in its next policy meeting in September.
Dollar index down
The dollar index measures the performance of the greenback against a basket of six other major currencies and dropped 0.1% to reach 108.66.
This was after it had come close to the two-decade high it had reached on Monday earlier at 109.48. The index is on course of recording a rise of 2.6% for the month of August.
This would mark a gain in the index for the third month in a row. A number of Fed policymakers have reiterated their support for additional increases in the interest rate for quelling the highest inflation seen in decades.
Loretta Mester, the President of Cleveland Fed, was the latest Fed official to join the list. She said on Wednesday that rates would have to go beyond 4% next year and then stay there for a while.
These comments come after the hawkish speech delivered by Jerome Powell at the annual banking conference in Jackson Hole, Wyoming last Friday.
The chairman of the US Federal Reserve had slammed the door on the possibility of a pivot from the central bank that would see it reducing rates in the next year.
Analysts said that markets were still reacting to Jackson Hole because it does not seem possible that negative growth in the third quarter would convince the Fed to change its stance so soon.
According to the latest data, traders have priced in a 68.5% possibility of the Fed hiking the interest rate by 75 basis points in September.
Market analysts said that all the bets that were made in July about the Fed pivoting need to unwind, which means the dollar is going to rise as the Fed is not yet done with its tightening.
The only change in the markets, for now, is that the European Central Bank (ECB) is also now desperate to catch up in terms of rate hikes, which is supporting the euro/dollar pair.
On Wednesday, the euro was able to climb back above parity against the US dollar, but the common currency’s outlook remains uncertain for now because of recession fears and a worsening energy crisis.
Russia also stopped gas supplies to Germany on Wednesday through the Nord Stream 1 pipeline, which intensified the economic battle between Brussels and Moscow.
In addition, it also fanned fears of a recession with some of the world’s richest countries grappling with the idea of energy rationing.
The euro started the week well because of the gas story, but the narrative is fading fast and this would put a cap on the euro/dollar pairing.
The euro had last recorded gains of 0.31% against the dollar to reach $1.0047. The ECB is expected to deliver a big interest rate hike in September, as euro zone inflation reached new highs.