Dollar Hits New 20-Year High as Euro Slumps on Energy Woes

© Reuters.

By Ambar Warrick

AiVIF.com-- The U.S. dollar touched a new 20-year high against a basket of currencies on Monday, benefiting from weakness in the euro amid a worsening energy crisis, while investors continued to bet on more interest rate hikes by the Federal Reserve.

The dollar index, which weighs the greenback against a basket of currencies, rose as much as 0.5% to 110.03- its highest level since late-2002. U.S. dollar index futures rose in a similar range.

The greenback advanced further against the euro on Monday, after Russia shut a major gas pipeline to Europe, raising concerns over a severe power shortage in the bloc. 

The euro tumbled 0.3% and was last trading below $1.

Strength in the dollar also comes on the heels of better-than-expected nonfarm payrolls data on Friday, which gives the Federal Reserve more space to hike interest rates sharply. 

While wage growth slowed and unemployment rose unexpectedly, investors remained confident that relative tightness in the jobs market would give the central bank enough impetus to raise rates sharply in September.

Traders are pricing in a 57% chance the Fed will raise rates by 75 basis points this month. The central bank has hiked rates four times this year, as it struggles to combat inflation running at 40-year highs.

Hawkish signals from Fed Chair Jerome Powell in August suggested that the Fed likely sees inflation sticking to elevated levels for longer, which is likely to invite more interest rate hikes. Most Fed officials now see rates ending the year comfortably above 3%.

Rising interest rates in the U.S. have steadily pressured most other currencies this year, as the gap between U.S. and other yields narrowed.

Currencies such as the euro and the Japanese yen are among the worst-hit by rising interest rates, given the reluctance by their respective central banks to tighten policy.