Dollar gains, euro recovers earlier losses

The dollar gained on Tuesday as it benefited from expectations that the US economy will be stronger than peers and the Federal Reserve will continue to hike interest rates.

The dollar slipped against a volatile euro, however, as the single currency climbed back into positive territory, after dropping earlier on data showing that German investor sentiment fell slightly in August on concerns the rising cost of living will hit private consumption. 

Europe is struggling with an energy crisis after imposing sanctions on Russia due to its invasion of Ukraine. Russian state gas company Gazprom said on Tuesday that European gas prices could spike by 60% to more than $4,000 per 1,000 cubic meters this winter, as the company's own export and production continues to fall amid Western sanctions.

"The market is slowly pricing in a worse outcome this winter in Europe and that's the major reason the dollar's stayed so strong," said Adam Button, chief currency analyst at ForexLive in Toronto. "While the US outlook is deteriorating, it still looks better than Europe and much of Asia."

The US dollar index gained 0.09% to 106.55. The euro rose 0.08% against the dollar to $1.0167, after earlier falling to $1.0121, the lowest since Aug. 3.

The greenback gained 0.93% against the yen to 134.57 yen.

The Japanese currency, which is often affected by the difference between benchmark yields in the United States and Japan, rallied last week on expectations that cooler US inflation would mean a less aggressive pace of Fed tightening and so lower US yields.

However in recent days, several Fed policymakers have spoken of the need for continued rate hikes.

"Fed officials have no choice but to sound tough in the face of a very, very tight labor market and far too high inflation," Kit Juckes, head of FX strategy at Societe Generale, wrote in a research note.

"It's hard to build a compelling case to sell the dollar in that world."

The greenback was higher on the day even after US data showed that US homebuilding fell to the lowest level in nearly 1-1/2 years in July, weighed down by higher mortgage rates and prices for construction materials. 

Other data showed that industrial production rose more than expected in July.

The US currency has also benefited from safe haven flows as weak Chinese data and a surprise rate cut by China's central bank on Monday raise concerns about global growth.

The dollar has "supplanted the yen as the preferred safe haven in the fx market," said Button.

Commodities-sensitive currencies including the Australian dollar have also been hurt by worries about China's demand for iron ore and other assets.

The Aussie was down 0.11% on the day after minutes from the Reserve Bank of Australia's (RBA) August policy meeting showed that the RBA Board expected further rate hikes given inflation was far above target and the labor market at its tightest in decades.

The annual pace of Australian inflation rose even faster than first reported over the June quarter according to a new monthly measure of consumer prices.

The New Zealand dollar fell 0.41%, hurt by concerns about global growth. New Zealand's central bank is expected to deliver its fourth straight half-point rate hike on Wednesday but that appeared to have been priced into the currency already. 

The greenback fell 0.20% against the Canadian dollar after Canadian inflation data showed still high underlying inflation pressure and raised bets for a hefty rate hike by the Bank of Canada next month.