In five months, the euro surged against the dollar after a European Central Bank policy maker said further interest-rate hikes will be needed to curb inflation and as buoyant risk appetite curbed demand for dollars.
The common currency rose by as much as 1.6% against the dollar on Monday, the most since March. The central bank must take further steps if the inflation picture stays the same, according to Bundesbank President Joachim Nagel. The key rate was raised by the European Central Bank by an unprecedented 75 basis point last week, narrowing the interest-rate differential with the Federal Reserve.
The move came amid broad-based weakness in the dollar, with Bloomberg s gauge of the greenback's strength falling to its weakest level in almost two weeks. The euro was as strong as $1.0198. It also extended gains against the pound, rising to a one point to its highest since February 2021, at 87.22 pence.
The relief in equity prices and the recent broad dollar correction continue into the week, as markets focus on short-term peak central bank hawkishness and positioning is relatively defensive, wrote Citigroup strategists.
The move caught traders off guard, triggering stop losses and compounding the common currency's advance, according to two Europe-based traders. The market has been resolutely bearish on the euro's outlook as Russia continues to reduce gas supplies to the region, stoking inflation and raising the possibility of a recession.
Traders will be expecting another bout of potential hawkish ECB chatter on Monday, with ECB Executive Board member Isabel Schnabel set to speak. According to a Bloomberg survey of economists, markets have a view on US inflation data for August due Tuesday, which is expected to show a slowdown in price growth. That could further undermine the dollar's gains by reducing the need for aggressive rate hikes.
It seems quite universal from clients to expect the US CPI to slow down and that we have seen the peak, said Jordan Rochester, a currency strategist at Nomura International Plc. The question is how slow it falls, as most indicators suggest a drop in US inflation pressures.