ECB bets boost euro, US dollar slips from 20 year peak

THE euro climbed past parity against a softening US dollar on Tuesday (Aug 30), thanks to lower energy prices and the possibility of a supersized European Central Bank (ECB) rate hike.

The European common currency was 0.41 per cent higher at US$1.00390, extending the previous day’s rally, albeit from near 20-year lows.

“It’s about the ECB being priced far more aggressively over the past few sessions, as well as a little bit of pressure coming off the natural gas prices,” said John Hardy, head of FX strategy at Saxo Bank.

“It’s also noticeable we’ve seen a bit of magnetism around this parity level for euro/US dollar, so many times these big round levels can become major sticking points.”

British and Dutch wholesale gas prices eased on Tuesday as Europe almost reached its target of gas inventories being 80 per cent full.

Market pricing also indicates roughly a 50 per cent chance of a massive 75 basis point interest rate increase at the ECB’s next meeting after a parade of ECB speakers at the Fed’s annual symposium in Jackson Hole backed the case for a big hike, though this pricing came down a little on Tuesday.

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German CPI data due later in the day will help provide an indication of how aggressively the ECB will need to move to curtail inflation.

Preliminary Spanish data released earlier showed national consumer prices rose 10.4 per cent in August from a year earlier, down from 10.8 per cent the previous month.

Also on traders’ radars are several ECB speakers due to make public remarks later on Tuesday, which could guide markets towards or away from such a large rate increase.

The US dollar was also down against other majors, losing 0.46 per cent against the Japanese yen, as the rate sensitive currency benefited from lower US benchmark Treasury yields . Sterling gained 0.12 per cent to US$1.172.

The Australian dollar, often seen as a proxy for risk sentiment, rallied 0.5 per cent, alongside gains in shares.

The US dollar index - which measures the greenback against a basket of 6 currencies, with the euro the most heavily weighted - stood at 108.5, after dropping back from 109.48 overnight, a high not seen since September 2002.

An aggressive programme of rate hikes from the Federal Reserve has been supporting the US dollar, and US jobs figures due on Friday will be closely watched for further clues to the interest rate outlook.

Bitcoin was also on the front foot in line with markets’ positive attitude to riskier assets, trading at US$20,400, up from a 6-week low of US$19,526 hit over the weekend. REUTERS