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The
dollar index, a measure against six counterparts, with the euro
most heavily weighted, was up 0.3% at 108.45. It had earlier
climbed to 108.47, its highest since October 2002.
The euro has borne the brunt of dollar strength, falling as low
as $1.00005, the weakest since December 2002, a level some
analysts flagged as parity being tested.
By 1020 GMT it was changing hands at $1.00170, down 0.2%.
Neil Jones, head of currency sales at Mizuho Bank said a large
queue of buy euro orders at $1 to either reduce cash exposure
via purchasing spot or option structures was keeping the euro
steady around those levels.
The euro came close to being tipped over the edge after a dire
reading from the ZEW economic research institute, which showed
German investor sentiment nosedived in July to -53.8 points from
-28.0 in June.
The biggest pipeline carrying Russian gas to Germany, the Nord
Stream 1, began annual maintenance on Monday, with flows
expected to stop for 10 days. But governments and markets are
worried Russia might extend the shutdown, exacerbating the
energy crunch and tipping the economy into recession.
Analysts said the weak economy raises uncertainty over the
European Central Bank's plan to raise interest rates, initially
by 25 basis points in July, then by 50 bps in September.
"There doesn't seem to be a lot of support for euro at this
point. It does not just relate to gas prices but to what seems
to be a split within the ECB over how far they raise rates,"
said Sarah Hewin, senior economist at Standard Chartered,
"The expectation is for the (U.S. Federal Reserve) to do 75 bps
this month and its aim seems to be to get to neutral (rates) as
soon as possible, while with ECB, it's more of a mixed message
given the backdrop over gas."
The move towards parity has raised speculation of ECB
intervention but ECB sources have told Reuters there is no
appetite to intervene. The bank last stepped in to support the
single currency in 2000.
Euro weakness has been a big part of the dollar index's push
higher, but the U.S. currency is also supported by worries about
growth elsewhere, with China in particular implementing strict
zero-COVID policies to contain fresh outbreaks.
The offshore-traded yuan approached a one-month low of 6.753 per
dollar
Arguably the biggest factor in the dollar's rise, however, is
the view the Fed will hike rates faster and further than its
peers, with Fed funds futures pricing rates reaching 3.50% by
March, rising from 1.58% currently.
U.S. consumer price data due on Wednesday is expected to show an
8.8% annual rate for June.
The dollar slipped however to 136.94 yen, down 0.4%, following
Monday's jump to new 24-year highs at 137.75.
The global economy fears are undermining commodity prices and in
turn commodity-focused currencies. The Australian dollar gave up
0.22% to $0.6728, and earlier matched the two-year low of
$0.6716 reached on Monday.
The New Zealand dollar flatlined around $0.6117, just off
two-year lows, ahead of Wednesday's central bank meeting that
should deliver a half-point interest rate rise.
(Additional reporting by Kevin Buckland in Tokyo; editing by
Tomasz Janowski)
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