Dollar Edges Higher; Power Woes Weigh on Euro

The U.S. dollar edged higher in early European trade Wednesday after more hawkish Fed comments, while the euro continued to languish below parity.

At 03:15 ET (07:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 108.623.

Minneapolis Federal Reserve Bank President Neel Kashkari was the latest official to comment on the importance of the central bank to curb inflation above everything else, speaking at a gathering in Minneapolis on Tuesday.

“It’s very clear” the Fed has to tighten monetary policy, Kashkari said. “When inflation is 8% or 9%, we run the risk of unanchoring inflation expectations and leading to very bad outcomes.”

Fed chair Jerome Powell is due to speak at the Jackson Hole Symposium in Wyoming on Friday, and he is widely expected to continue the hawkish anti-inflation tone.

Elsewhere, EUR/USD fell 0.2% to 0.9952, with the euro having fallen more than 12% against the dollar this year, taking it below parity for the first time in two decades.

Eurozone business activity contracted for a second straight month in August, data showed on Tuesday, weighed by benchmark gas prices tripling in a little over two months.

Europe, and Germany in particular, is particularly exposed because of its dependence on imports from Russia. Gas supplies have already been reduced, and further cuts would heap even more strain on the region’s economies.

The “PMIs all but confirmed the market’s concerns about the toxic combination of high energy prices and slowing global demand,” said analysts at ING, in a note. “A drop to 0.9800 in our view is more likely than a sustained recovery above parity in the near term.”

GBP/USD dropped 0.1% to 1.1817, after the latest U.K. PMI data showed a slowdown in economic activity.

“We see downside risks for cable as yesterday’s dollar drop may be unwound further, with 1.16/1.17 remaining the bias for this week,” added ING.

USD/JPY edged higher to 136.81, while USD/CNY rose 0.4% to 6.8641, coming close to a two-year high as reports of potential power cuts in industrial hub Shanghai weighed on the yuan.

The country is facing a severe heatwave, which has dried up some of its riverbeds and impacted regions dependent on hydroelectric power, adding more headwinds to manufacturing activity after a series of COVID lockdowns this year.