The Dollar Retreats, the Euro Breathes a Sigh of Relief

In response to relief that Energy shortages may not be a problem in Europe, the US dollar retreats as the euro extended its overnight bounce

The US dollar recovered on Wednesday as the euro extended its overnight rally. The euro benefited from relief that Europe might be able to avoid the worst fears regarding energy shortages, and from the possibility that the European Central Bank may hike interest rates more aggressively than previously anticipated.

On Tuesday, Reuters reported that Russian gas flows across the Nord Stream 1 pipeline are expected to resume on time on Thursday following scheduled maintenance.

The euro gained nearly 0.2% in early Asian trade, having gained 0.75 percent overnight, its biggest gain in a month.

Aiding sentiment was news that the ECB is considering raising interest rates by a larger-than-expected 50 basis points at their meeting on Thursday.

“Russian gas flow resumes tomorrow, which will boost Euro/Dollar and help euro get away from parity in the near-term,” says Carol Kong, a Commonwealth Bank currency strategist.

“Nonetheless, I’m still concerned about the euro/dollar, I think downside risks remain…the potential hawkish pivot by the ECB may not be able to provide sustained support.”

Following a red-hot US inflation print and concerns about a sharp decline in the eurozone economy, last week the euro broke parity for the first time in two decades.

With the weakening greenback and the hawkish stance of central banks throughout the world, other major currencies rose in value.

At next week’s Federal Reserve policy meeting, the Fed is expected to hike interest rates by 100 basis points, contributing to the US currency’s decline.

In the last month, Sydney’s dollar has risen 1.3 percent on the day to $0.69055.

Earlier this week, the Reserve Bank of Australia (RBA) issued minutes from its July policy meeting, which showed more policy tightening would be needed to curb inflation.

Philip Lowe, who heads the Reserve Bank of Australia, suggested earlier on Wednesday that rates could double from their current level.

Likewise, sterling rose to $1.20145 by 0.15%

In a press conference on Tuesday, Governor Andrew Bailey confirmed the Bank of England’s next meeting will consider increasing rates 50 basis points.

The dollar index was down 0.08 percent at 106.58, well off last week’s peak of 109.29.

The odds of a 100 basis point rate hike in the Fed’s January meeting are 23.2 percent, with expectations of a jumbo rate increase easing after policymakers tempered their expectations.

“Markets continue to price out potential FOMC rate hikes, which will lower the U.S. dollar, but I don’t think any dollar weakness will last long given deteriorating global growth prospects,” said Kong at CBA.

As a result, the Japanese yen remained an outlier on Wednesday morning, trading at 138.155 per dollar as the Bank of Japan appears determined not to reverse its dovish policy.

“The BoJ will have to adjust its policy in light of a sharp drop in the JPY, which has dropped by 20-21% since the September FOMC,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.

Recently, Bitcoin had briefly bounced off the $20,000 mark and was down about 1.2% to $23,000.

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