By Peter Nurse 

- The U.S. dollar eased lower in early European trade Thursday, but remained near a two-decade high ahead of the start of the Federal Reserve’s Jackson Hole gathering as traders look for more cues on monetary policy.

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.5% lower to 108.062, still close to its highest level since September 2002 at 109.29 reached in mid-July.

The dollar has been boosted over the last week or so by hawkish comments from a series of Fed officials, signaling that the central bank is likely to continue with its aggressive interest rate hikes with inflation still at 40-year highs.

This brings the Fed’s annual get together in Jackson Hole, Wyoming, starting later Thursday, firmly in focus, and in particular Chairman Jerome Powell’s speech at the end of the week.

"Fed officials have spent the last couple of weeks actively managing expectations, indicating that the central bank has a more hawkish approach to policy, denying the problems in the economy that investors so fear," said an analyst at FxPro. "Traders in the markets are speculating whether this means the risk of a third consecutive rate hike of 75 points in September."

"In this scenario, the dollar index is moving towards 120 (+10.5% to the current price), which is at its 2001-2002 highs. It is likely that on the approach to these levels, even the hawkish Fed and Treasury are concerned about a strong dollar."

Elsewhere, EUR/USD rose 0.5% to 1.0020, climbing back above parity after the German economy grew in the second quarter, beating expectations for no growth.

Europe's largest economy grew by 0.1% quarter-on-quarter and 1.8% on the year, supported by private and government spending despite the energy crisis.

The minutes from the July meeting of the European Central Bank are due later in the session, and these are likely to be hawkish given the central bank lifted interest rates by 50 basis points at the time.

GBP/USD rose 0.5% to 1.1852, bouncing from the lowest level since March 2020 of 1.1718 as the country faces a prolonged slowdown. The Bank of England expects a recession to start in the fourth quarter, lasting into the early part of 2024.

USD/JPY fell 0.4% to 136.60, with the yen recovering against the dollar despite Bank of Japan board member Toyoaki Nakamura saying earlier Thursday that recent headwinds to the Japanese economy from rising commodity prices and COVID-19 cases mean that the central bank was unlikely to raise interest rates any time soon.

USD/CNY fell 0.2% to 6.8474, after the People’s Bank of China set a stronger daily fixing, while the risk-sensitive AUD/USD rose 1% to 0.6975.