Dollar sags below 20-year peak as euro lifted by ECB bets

The dollar languished on Tuesday after being beaten back from a two-decade high versus major peers, by a reinvigorated euro.

The tables turned for the two currencies, as traders began ramping up bets for a super-sized 75 basis-point rate hike by the European Central Bank, while parsing the odds for one by the US Federal Reserve.

The dollar index — which measures the greenback against a basket of six currencies, with the euro the most heavily weighted — stood at 108.65 at the start of the Asian day, after dropping back from 109.48 overnight, a level not seen since September 2002.

The euro edged 0.08 per cent higher to $1.00045, extending Monday's 0.32 per cent rally — which was its biggest in almost three weeks — after failing to keep its head above parity for the past week.

"The euro has found some stability near parity with help from reports that a 75bp hike could be on the cards at the September ECB meeting,'' said Sean Callow, a currency strategist at Westpac in Sydney.

"But the euro's yields remain unappetising, and the deepening gas crisis in Europe means that more aggressive ECB hikes would only deepen recession. We expect EUR/USD to print fresh 20-year lows in coming days, with 0.98 the next obvious target."

Traders see better than 50 per cent odds for a 75 bps move by the ECB on September 8, after a parade of ECB speakers at the Fed's annual symposium in Jackson Hole backed the case for a big hike.

By comparison, bets for a 75 bps increase by the Fed on September 21, while higher at 70 per cent, have receded from as much as 75 per cent on Monday.

Monthly US jobs figures due on Friday will be closely watched, for further clues on the rates outlook.

The euro was also helped by a retreat in European gas prices, after German economy minister Robert Habbeck said the country was filling gas storage facilities faster than expected.

• Explainer: Euro falls below parity with the dollar. What's the impact?