Dollar Retains Strength; Euro Plummets Below Parity

The U.S. dollar pushed higher Tuesday ahead of the central bank’s key Jackson Hole symposium later this week, while the euro fell to two-decade lows as Europe’s energy woes deepened.

At 2:50 ET (06:50 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 109.108, not far from the two-decade high of 109.29 hit in July.

A majority of market participants now expect the Federal Reserve to raise rates by 75 basis points in September, data from exchange operator CME Group showed on Tuesday.

This hawkish turn of sentiment follows several Fed officials suggesting during last week that the bank will likely not reduce its pace of rate hikes until inflation is comfortably within its target.

This puts the focus on Fed Chairman Jay Powell’s speech in Jackson Hole, Wyoming on Friday for clues on the future path of U.S. interest rates.

Elsewhere, EUR/USD fell 0.3% to 0.9911, dropping below parity to its lowest level since late 2002 as Europe struggles with energy supply and slowing growth concerns.

Russian energy giant Gazprom announced late Friday that it will halt natural gas supplies to Europe via the Nord Stream 1 pipeline for three days at the end of the month.

Adding to this, damage to a key pipeline system running oil from Kazakhstan through Russia and into Europe further disrupted supply earlier Tuesday.

Fears are mounting that western Europe could struggle to guarantee a stable energy supply during the winter months, which would be devastating for business activity just as the European Central Bank tightens monetary policy to tackle soaring inflation.

Eurozone flash PMI data are due later in the session, and are expected to show another month of business contraction in August as sentiment weakens.

“Adding to the sell-off may well be the portfolio adjustments of Asian central banks,” said analysts at ING, in a note. “Asian FX remains under heavy pressure and will prompt intervention to sell dollars and support local currencies. Asian FX reserve managers will then need to sell EUR/USD to re-balance FX portfolios to benchmark weightings.”

GBP/USD dropped 0.3% to 1.1730, falling to a new 2.5-year low overnight, with energy and slowdown concerns continuing to weigh on sterling, after the Bank of England warned last week that the country’s economy would likely enter a prolonged recession in the fourth quarter.

Cable has already broken through July’s 1.1760 low, “thereafter it is hard to rule out a move to 1.15 – a level seen in the March 2020 flash crash,” added ING.

USD/JPY fell 0.2% to 137.16, after earlier climbing to a one-month high of 137.71, the risk-sensitive AUD/USD fell 0.1% to 0.6866, while USD/CNY rose 0.2% to 6.8632, not far from a nearly two-year high of 6.8752 hit on Monday.