Euro jumps on hawkish ECB signals, weakening dollar

The euro jumped to a more than three-week peak versus the dollar on Monday, as European Central Bank officials argued for further aggressive monetary tightening and the greenback softened against most majors except the under-fire Japanese yen.

The European common currency rose around 1.5% to $1.0198, its highest since Aug. 17, and well up from a 20-year trough of $0.9862 hit last week. It was last up 0.88% at $1.01345.

"Positions are pretty stretched, everyone and his dog has been long dollar, and we had (ECB) comments over the weekend, which are very hawkish and that fed this perception that maybe the market is overdone," said Jane Foley, head of FX strategy at Rabobank.

Bundesbank President Joachim Nagel told German radio over the weekend that if the picture for consumer prices doesn't change "further clear steps must follow."

In addition, ECB policymakers see growing risks they will have to raise their key interest rate to 2% or more to curb record inflation in the euro zone, sources told Reuters.

Foley said the chance of lower U.S. inflation data on Tuesday, which also boosted stocks, was also pushing investors away from the safe haven dollar, though this was likely just a pocket of profit taking.

"As long as the market is fearful of taking significant risk in high risk currencies the dollar will be firm for another six months or so," she said.

The euro's strength was also seen against the pound and it rose as high as 87.22 pence on Monday, its highest since February 2021.

The greenback's weakness on the day meant sterling gained 0.8% on the dollar to $1.1678, and hit its highest level this month early in London trading, marking a small recovery from last week's 37-year low.

The dollar index, which measures the currency against six major counterparts, was down 0.67% at 108.25 down from a two-decade peak of 110.79 reached on Wednesday.

Investors are wary ahead of the U.S. CPI report, which Commonwealth Bank of Australia analysts said could determine whether the U.S. Federal Reserve increases rates by 50 basis points or 75 basis points at its meeting next week.

Fed officials continued their hawkish rhetoric on Friday, before a black-out period leading up to the central bank's deliberations.

Fed Governor Christopher Waller said he supports "a significant increase at our next meeting," while St. Louis Fed President James Bullard reiterated his call for a hike of 75 basis points.

The dollar was steady against the rate-sensitive Japanese yen, at 142.66 yen, a little off its 24-year high of 144.99 hit last week.

Japanese officials over the weekend hinted at intervention to stop the currency weakening further. A senior government spokesman said in a local television interview that the administration must take steps as needed to counter excessive yen declines.

At the same time, the Bank of Japan is unlikely to step in to support the currency with higher interest rates, sources told Reuters.

The Australian dollar, which typically performs well when investors are positive about growth, was 0.34% higher at $0.6870 and bitcoin, which moves in a similar manner, was up 1.3% around $22,100, having earlier hit highest since mid August.

(Editing by Jacqueline Wong, Sam Holmes and Chizu Nomiyama)