Dollar eases from near two-decade peak as Jackson Hole looms

© Reuters. FILE PHOTO: Chinese Yuan and U.S. dollar banknotes are seen in this illustration taken February 10, 2020. REUTERS/Dado Ruvic/Illustration

By Kevin Buckland

TOKYO (Reuters) - The U.S. dollar edged back from a near two-decade peak against a basket of major currencies on Thursday as investors awaited a speech by Federal Reserve Chair Jerome Powell the following day for fresh clues on the path for monetary policy.

Gains for Australia's dollar, a liquid proxy for trading China's economic outlook, outpaced developed-market peers as it tracked a stronger yuan.

The South Korean won rose after the central bank raised its inflation forecast, pointing to further policy tightening ahead.

The U.S. dollar index, which measures the greenback against six counterparts, eased 0.19% to 108.42, but remained not far from its highest since September 2002 at 109.29, touched in mid-July.

Investors have been bracing for the Fed to double down on its commitment to crushing inflation at its annual gathering in Jackson Hole, Wyoming.

Money markets have pared back expectations that the U.S. central bank could tilt to a slower pace of rate hikes following a chorus of hawkish Fed commentary in recent weeks, and currently lay 58.5% odds on another super-sized 75 basis-point rate hike next month versus 41.5% probability of a half point increase.

"Expectations of a hawkish message from FOMC Chair Powell at Jackson Hole will likely keep upward pressure on the USD," Commonwealth Bank of Australia (OTC:CMWAY) analyst Kristina Clifton wrote in a client note.

"However, there is a risk that the speech is deemed not hawkish enough and that we see some retracement in the USD."

The dollar retreated 0.25% to 136.78 yen, from this week's one-month high of 137.705.

The euro edged 0.18% higher to $0.99865, after sliding to a 20-year low of $0.99005 on Tuesday.

The single currency has been hurt by growth concerns as the region faces an energy crisis, with investors on edge before Russia halts gas supplies through the main Nord Stream 1 pipeline for three days from Wednesday for unscheduled maintenance.

Sterling gained 0.2% to $1.1815, after dipping to the lowest since March 2020 on Tuesday at $1.1718.

The Australian dollar rallied 0.59% to $0.69475, up from a more than one-month low of $0.6856 earlier in the week.

That's as China's yuan rebounded from a two-year low, helped by firmer-than-expected official guidance, which traders took as a sign authorities are becoming increasingly uncomfortable with rapid losses in the currency.

"In terms of the sharp AUD bounce today, an obvious catalyst appears to be the bounce in CNH on the stronger than expected fixing," said Sean Callow, a strategist at Westpac in Sydney.

"The positive equity mood in much of the region does help the Aussie in the background."

New Zealand's kiwi lagged its Antipodean peer with a 0.35% rise to $0.6212, hampered by data showing a decline in local retail sales early in the session. It was at a one-month low of $0.6157 on Monday.

Against the Korean won, the dollar lost 0.27% to 1,336.96 after the Bank of Korea raised rates by a quarter point, as expected, but also upgraded this year's inflation forecast to 5.2% from 4.5%, which would be the fastest rate since 1998, and next year's to 3.7% from 2.9%.