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Title: Dollar Climbs to Highest Level in 20 Years; Payrolls Eyed

May 06, 2022 02:57AM ET

By: AnalysisWatch

The U.S. dollar rose to its highest level in two decades in early European trading on Friday ahead of the release of the widely watched monthly U.S. jobs report, which could set the stage for further monetary tightening.

At 3 a.m. Central European Time, the dollar index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 104.040, surpassing 104 for the first time in 20 years.

The U.S. Federal Reserve on Wednesday announced a 50-basis-point interest rate hike, the biggest increase since 2000, and although Chairman Jerome Powell indicated that policy makers are not actively considering bigger moves in the future, the market is not so sure.

Traders are now focused on the release of the April non-farm payrolls report. Economists believe that approximately 400,000 new jobs were created last month. This is a solid report that would not undermine the case for aggressive monetary tightening as inflation is at its highest in forty years.

This Fed stance is putting pressure on other central banks. For example, the head of Germany's Ifo Institute said on Friday that the European Central Bank needs to raise interest rates in line with the United States as soon as possible given the high inflation in the eurozone.

Earlier, ECB Executive Board member Fabio Panetta, a known diver, admitted in a newspaper interview on Thursday that negative interest rates and quantitative easing are not appropriate at the moment.

However, EUR/USD fell 0.4% to 1.0494, just above last week's five-year low of 1.0469.

The Bank of England also raised its key interest rate by 25 basis points on Thursday, marking the fourth such move in a row. However, following the central bank's warning that the economy is at risk of recession, the GBP/USD currency pair fell by more than 2%, marking its biggest one-day loss since 2020, and the currency pair is currently down another 0.6% at 1.2294.

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