Euro Climbs Most in Six Months as Hawks Help Cool Dollar Fever

(Bloomberg) — The euro surged the most in six months after a European Central Bank policy maker said further interest-rate hikes may be needed and as traders bet US inflation data later this week could undermine the need for aggressive tightening in the US.

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The common currency rose as much as 1.6% to $1.0198, its biggest increase since March. Bundesbank President Joachim Nagel said the central bank must take further clear steps if the inflation picture stays the same. 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 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 CPI data for August is expected to show a slowdown in price growth, according to a Bloomberg survey of economists.

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 Federal Reserve in tightening policy against the backdrop, contributing to the euro’s slide to a two-decade low this year. Investors have only been this short the common currency five times in the last two decades, according to custody data from Bank of New York Mellon.

“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 since February 2021 at 87.22 pence. Monday’s move caught traders off guard, triggering stop losses and compounding the common currency’s advance, according to two Europe-based traders.

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, FX strategist at ING Groep NV.

(Adds context throughout. A previous version of this story corrected the size and scope of the euro’s increase in the headline and lede.)

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