The euro has surged the most in six months after a European Central Bank policymaker said further interest rate rises may be needed. Meanwhile, traders bet US inflation data later this week could undermine the need for aggressive tightening in the US.
The common currency rose as much as 1.6 per cent to $1.0198, its biggest increase since March.
The central bank must take further clear steps if the inflation picture stays the same, Bundesbank president Joachim Nagel said.
The ECB raised its key rate by an unprecedented 75 basis points last week to curb the fastest pace of consumer price growth on record, narrowing the interest-rate differential with the US Federal Reserve.
The moves came amid broad-based weakness in the dollar, with Bloomberg’s gauge of the greenback’s strength falling to its weakest level in almost two weeks and extending a retreat from a record high touched earlier this month.
US consumer price index data for August is expected to show a slowdown in inflation growth, a Bloomberg survey of economists found.
The market has been resolutely bearish on the euro’s outlook as Russia continues to curb gas supplies to the region, stoking inflation and raising the prospect of a recession.
The ECB has lagged the Fed in tightening policy against the backdrop, contributing to the euro’s slide to a two-decade low this year.
Investors have been this short on the common currency only five times in the past two decades, custody data from Bank of New York Mellon showed.
“To justify clients adding to these shorts, we have to say the euro is facing existential issues or the financial system is facing systemic risks. Neither of which is a reasonable assessment of the eurozone’s current predicament,” said Geoffrey Yu, a senior strategist at the bank. “The burden of adjustment is clearly towards taking off short euro positions.”
The euro also extended gains against the pound, rising at one point to its highest level since February 2021 at 87.22 pence.
Monday’s move caught traders off guard, triggering stop losses and compounding the common currency’s advance, two Europe-based traders said.
The euro could also find a firmer footing with focus on a speech from ECB executive board member Isabel Schnabel. Reports of an unexpected breakthrough by Ukraine’s forces in the war against Russia also helped to buoy sentiment on the euro.
“We are clearly in a mini-correction phase in the dollar at the moment, largely triggered by the recovery in risk sentiment and some unwinding of stretched long dollar positions,” said Francesco Pesole, an FX strategist at ING Group.
