Dollar touches 20-year high, but kept in check by euro, as rates in focus

The dollar touched a fresh 20-year high on Monday, fuelled by hawkish comments by Federal Reserve Chair Jerome Powell, but was kept in check by the euro, which was supported by growing expectations for European Central Bank (ECB) rate hikes.

The dollar index, which measures the currency's value against a basket of peers, scaled a fresh two-decade peak of 109.48 before retreating.

The greenback was up 0.73% against Japan's yen, while Britain's pound notched a fresh 2-1/2 year low in thin trading, with the UK on a public holiday.

Powell told the Jackson Hole central banking conference in Wyoming on Friday that the Fed would raise rates as high as needed to restrict growth, and would keep them there "for some time" to bring down inflation that is running at more than three times the Fed's 2% goal.

"Powell's comments endorsed the pricing of a higher Fed funds rate for a longer period," said Kenneth Broux, a currency strategist at Societe Generale. "The assumption that the Fed would start cutting rates in mid-2023 is premature."

Money markets ramped up bets for a more aggressive Fed rate hike in September, with the chances of a 75 basis point hike now seen around 70%. U.S. Treasury yields shot up, with two-year bond yields hitting a 15-year high at around 3.49%.

The euro clawed its way higher, helped by "ECB comments and rumors including contemplation of a 75bps hike at the September 8th ECB meeting," said Derek Holt, head of capital markets economics at Scotiabank.

The euro was last up 0.34% against the dollar, but remained below parity at $0.99985.

In cryptocurrencies, bitcoin recovered some ground to trade back above the $20,000 level.