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FOREX-Dollar eases, but remains near 2-decade highs

·3 min read

(Adds analyst comments, updates prices)

By John McCrank and Saqib Iqbal Ahmed

NEW YORK, Aug 31 (Reuters) - The dollar eased against a basket of currencies on Wednesday, but remained near the 2-decade high hit on Monday, as traders braced for more interest rate hikes from the U.S. Federal Reserve.

The dollar index, which measures the greenback against a basket of six currencies, was last down 0.1% at 108.66, after earlier coming within a whisker of Monday's two-decade peak of 109.48.

The index is on track for a rise of around 2.6% in August, its third-straight monthly gain.

A steady line of Fed officials have reiterated support for further rate hikes to quell decades-high inflation, the latest being Cleveland Fed President Loretta Mester, who said on Wednesday that rates will have to rise to "somewhat above 4%" by early next year and then be held there for some time.

The comments followed a hawkish speech from Fed Chair Jerome Powell at the Jackson Hole central banking symposium in Wyoming last week that slammed the door shut on the idea that the Fed might pivot and begin lowering rates by mid-2023.

"We're still trading on Jackson Hole," said Joseph Trevisani, senior analyst at FXStreet.com. "The idea that they're going to do a 180 and reverse again if we end up with negative growth in the third quarter just doesn’t seem possible."

Traders are now pricing in about a 68.5% chance of a 75 basis point Fed rate hike next month, according to data from Refinitiv.

"All of these bets that came in late July about the Fed potentially pivoting have to unwind, and so that's meant we've got to buy dollars again because the Fed is not done," said Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull.

"The only real change we've had now is that we have an ECB (European Central Bank) that looks like it's desperate to catch up and so the rate spreads are helping euro-dollar kind of hang in there," he said.

The euro rose back above parity with the dollar on Wednesday, but the outlook for the common currency remained mired in uncertainty amid a burgeoning energy crisis and recession fears.

On Wednesday, Russia halted gas supplies from the Nord Stream 1 pipeline, intensifying an economic battle between Moscow and Brussels and raising the prospects of a recession and energy rationing in some of the world's richest countries.

"The narrative that has helped the euro at the start of the week, which is an improvement in the gas story, is fading now, which we think will put a cap on euro-dollar," said ING currency strategist Francesco Pesole.

The euro was last up 0.31% at $1.0047.

Inflation in the euro zone rose to another record in August, beating expectations and solidifying the case for further big European Central Bank (ECB) rate hikes.

A growing number of ECB officials have been calling for oversized rate hikes to combat surging inflation, which could exceed 10% in the coming months.

Elsewhere, Norway's krone fell about 1.5% against the dollar after the country's central bank said it would buy more foreign currency for its sovereign wealth fund.

Sterling was down 0.3% at $1.16185 and on pace for its worst month since October 2016 against the dollar with a drop of 4.6% as investors worry the British economy is slowing sharply just as inflation gathers pace.

Bitcoin was up 0.73% to 19,963, but gains were capped as investors remained wary of risky assets.

(Reporting by John McCrank and Saqib Iqbal Ahmed in New York; additional reporting by Samuel Indyk in London; Editing by Jonathan Oatis, Kirsten Donovan)