By Caroline Valetkevitch

NEW YORK (Reuters) – The U.S. dollar fell to its lowest level in about two weeks against a basket of currencies on Monday following recent strong gains, as investors grew nervous ahead of U.S. inflation data and as central banks outside of the United States appeared increasingly hawkish.

The euro climbed to more than a three-week high against the dollar, with European Central Bank officials arguing for further aggressive monetary tightening.

Strategists said the release on Tuesday of the monthly U.S. consumer price index report will be closely watched for clues on how aggressive the Federal Reserve may need to be in hiking interest rates next week to fight high inflation.

After hawkish comments from Fed Chair Jerome Powell and other U.S. central bank officials last week, U.S. rate futures were pricing in a high chance of a 75-basis-point hike at the Sept. 20-21 policy meeting.

The , which measures the currency against six major counterparts, was 0.5% lower on the day at 108.16, and it hit its lowest level since Aug. 26. It reached a two-decade peak of 110.79 last Wednesday.

“It’s been a break in the dollar’s relentless rise,” said Joe Manimbo, senior market analyst at Convera. “What’s behind that basically is improved risk sentiment, hawkish central banks from abroad and hopes that U.S. inflation will suggest that the worst is behind us, (with) consumer prices coming out tomorrow.”

The euro rose against the dollar to its highest level since Aug. 17. It hit a 20-year trough of $0.9862 last week.

The euro was last up 0.8% at $1.0127.

ECB policymakers see increasing risks that the central bank will need to hike its key interest rate to 2% or more to curb record inflation in the euro zone, sources told Reuters.

At the same time, the Ifo institute said on Monday, in a U-turn from its forecast three months prior, that Germany’s economy will contract next year as a dramatic rise in energy costs due to the Ukraine war extinguishes the chances of recovery after COVID-19 lockdowns.

Against the dollar, sterling was last trading at $1.1707, up 1.1% on the day and up from last week’s 37-year low.

The dollar was also down slightly against the Japanese yen, at 142.52 yen, and off its 24-year high of 144.99 hit last week.

Over the weekend, Japanese officials hinted at intervention to stop the currency from weakening further. A senior government spokesman said in a local television interview that the administration must take steps as needed to counter excessive yen declines.

The Australian dollar was 0.6% higher at $0.6884.

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Currency bid prices at 10:53AM (1453 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index

108.1600 108.7500 -0.52% 13.064% +108.8600 +107.8000

Euro/Dollar

$1.0127 $1.0046 +0.82% +0.00% +$1.0198 +$1.0060

Dollar/Yen

142.5150 142.6500 -0.09% +0.00% +143.4900 +142.0500

Euro/Yen

144.33 143.23 +0.77% +0.00% +145.6300 +143.4000

Dollar/Swiss

0.9515 0.9606 -0.94% +0.00% +0.9608 +0.9515

Sterling/Dollar

$1.1707 $1.1584 +1.08% +0.00% +$1.1710 +$1.1602

Dollar/Canadian

1.2976 1.3020 -0.34% +0.00% +1.3053 +1.2964

Aussie/Dollar

$0.6884 $0.6847 +0.57% +0.00% +$0.6890 +$0.6797

Euro/Swiss

0.9635 0.9643 -0.08% +0.00% +0.9746 +0.9636

Euro/Sterling

0.8648 0.8663 -0.17% +0.00% +0.8722 +0.8651

NZ

Dollar/Dollar $0.6151 $0.6103 +0.74% +0.00% +$0.6157 +$0.6052

Dollar/Norway

9.8260 9.9235 -0.91% +0.00% +9.9075 +9.7900

Euro/Norway

9.9480 9.9629 -0.15% +0.00% +10.0075 +9.9428

Dollar/Sweden

10.4819 10.6301 -0.39% +0.00% +10.6095 +10.4385

Euro/Sweden

10.6172 10.6592 -0.39% +0.00% +10.6827 +10.6089