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Rate hike bets buoy euro and bolster U.S. dollar

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SINGAPORE — The dollar was firm on Wednesday as stronger-than-expected U.S. economic data and hawkish Federal Reserve comments pointed to higher interest rates, while rate-hike bets in Europe also have the common currency clinging on above parity.

German inflation running at its highest in nearly 50 years and a growing chorus of European Central Bank officials calling for big rate hikes has markets pricing a better-than-even chance of a 75 basis point (bps) rate hike next week.

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The euro rose 0.16% to $1.0032 in the Asia trade, which if sustained would make for a third session of gains in a row, though it is still nearly 2% down for the month. Eurozone inflation data is due at 0900 GMT.

“The story in Europe is really not any better. The only thing that is kind of holding the euro just around parity is this hawkish rhetoric coming from ECB speakers,” said Rodrigo Catril, a currency strategist at National Australia Bank.

“The inflation numbers we got from Germany are kind of setting expectations for a strong number as well coming for the euro zone today.”

The U.S. dollar index, which measures the greenback against a basket of currencies, hovered at 108.64, just below a two-decade peak of 109.48 made on Monday. It has climbed about 2.7% for the month, and is on track for a third straight month of gains.

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Meanwhile, sterling gained 0.21% to $1.1679, after hitting a fresh 2-1/2-year low of $1.1622 overnight. The sliding yen steadied at 138.61 per dollar.

Chinese data out on Wednesday showed that factory activity in the world’s second-largest economy contracted again in August, as new COVID infections, the worst heatwaves in decades and a property sector crisis weighed on production.

Commodity currencies such as the Aussie were little fazed by the weak China data, however, having been battered by a strong U.S. dollar overnight. The Australian dollar was up 0.31% to $0.68755, though that is after a 0.7% overnight fall.

The kiwi was up 0.19% to $0.6140, after having slid 0.43% overnight.

Likewise, the Chinese offshore yuan was kept under pressure at 6.9029 per dollar.

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All eyes remain on the U.S. nonfarm payrolls data due on Friday, with a robust job openings data released overnight potentially foreshadowing a strong showing at the end of the week, making the case for more aggressive rate hikes.

New York Fed chief John Williams told the Wall Street Journal that it will “take some time” before interest rates would be cut, while Atlanta Fed President Raphael Bostic said: “I don’t think we are done tightening.”

Traders are now pricing in about a 72.5% chance of a 75 bps Fed funds rate hike next month.

Cryptocurrencies were staging a rebound on Wednesday, with Bitcoin up 2.86% to $20,385, and Ether, the coin linked to the ethereum blockchain network, up 5.45% to $1,606.3.

(Reporting by Rae Wee; Editing by Sam Holmes and Kim Coghill)

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