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Dollar Retreats, Euro Edged Higher After ECB Interest Rate Hike

The U.S dollar dipped on Friday amid a euro resurgence following the European Central Bank’s decision on Thursday to raise borrowing costs above expected levels. 

The Dollar Index, which tracks the U.S dollar against a basket of six other currencies, edged lower by 0.1% and is now trading at 106.660. With the dollar’s performance this week, the DXY is expected to wrap up the week with a 1% drop, its first loss in nearly four weeks. 

The dollar’s performance this week has mainly been controlled by expectations that the Federal Reserve will go ahead with an interest rate hike next week. Following poor consumer inflation data in June, analysts expect less than a 100 basis points interest rate hike. 

According to data released this Thursday, there has been a drop in factory activities and an increased application for unemployment benefits. This is a clear sign that the economy is already feeling the impact of the Fed’s continued aggressive policy tightening. 

After performing poorly last week, the euro has performed better than other currencies this week. Despite taking a breather during Friday’s trading session, it is set to finish the week on a good note. 

Euro’s performance and the ECB rate hike

The EUR/USD pair dropped 0.2% and is now trading around 1.0240. Despite dropping some gains, it is on course for a 1% weekly gain. Euro’s continued rise comes after the European Central Bank increased interest rates above expectations. While policymakers had expected a 25 basis point hike, the ECB hiked the interest rate by 50 basis points. 

The ECB also announced the launch of a new tool, the Transmission Protection Instrument. Even though the ECB stated that the tool is designed to tame peripheral nation bond yields, they weren’t so clear about the specifics. 

Another thing pushing the euro this week is the news that Russia restarted oil supply through the Nord Stream 1 pipeline after earlier announcing that the pipeline would be closed for 10-days, citing maintenance. 

Meanwhile, the EU has advised member states to reduce gas demands by 15% as it aims to prepare for a worst-case scenario should Russia pull off another stunt in the future. 

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