Dollar Holds Near 20-Year High Amid Federal Reserve's Rate Hike Outlook

The dollar held near a 20-year high on Monday as the euro struggled around the $1.05 mark, as investors prepared for a busy week of central bank meetings including a likely Federal Reserve interest rate hike.

Markets in Asia and London were closed for public holidays so trading was quiet.

Investors are expecting the Fed to hike rates by 50 basis points when it meets, and the uncertainty is around how hawkish Fed Chair Jerome Powell will sound in comments following the decision.

Markets are pricing in an aggressive run of rate hikes from the Fed as it tries to tame soaring inflation.

That, together with an expected much slower rate of European Central Bank tightening and worries about the impact of the war in Ukraine on the euro zone economy have sent investors scrambling for dollars and left the euro at levels last seen in 2017.

The dollar index gained 5% in April, its best monthly performance since January 2015.

"We expect the USD to stay strong versus the EUR, as a hawkish FOMC [Federal Open Market Committee] stance and geopolitical concerns will support the USD. Short-term investors may look to sell rallies in EURUSD above $1.08," Thomas Flury, strategist, and Brian Rose, senior U.S. economist at UBS Global Wealth Management wrote in a research note.

They have lowered their euro/dollar forecasts to $1.05 for June from a previous $1.11, $1.06 for September, $1.08 for December and $1.10 for March 2023.

The dollar index was last 103.19, down marginally on the day. The euro traded up 0.1% at $1.0555.

BNP Paribas said last week that big speculative flows and not concerns about a worsening economic outlook explained the euro's slide to a five-year low below $1.05 this week.

Elsewhere, the dollar gained half a per cent on the Chinese yuan in offshore markets, reaching 6.6895 and just below its strongest since late 2020.

Sterling slipped 0.1% to $1.2569, while Japan's yen was down against the dollar at 130.16 but off recent lows.

Other central bank meetings this week include the Bank of England on Thursday, where it is expected to raise rates 25 basis points to 1%.

The Australian and New Zealand dollars initially fell sharply in Asian hours as a selloff on Wall Street undermined risk appetite and overshadowed the prospect of higher interest rates at home.

But by 0715 GMT the Aussie had bounced off three month lows and was last at $0.7060, unchanged on the day.

The Australian dollar shed 5.7% last month as fears of a recession in Europe and lockdowns in China undermined risk assets.

The kiwi dollar was pinned at its lowest since mid-2020 at $0.6422, having lost 6.9% in April.