By Peter Nurse

Investing.com - The U.S. dollar edged lower in early European trade Friday, but remained near a two-decade high ahead of the widely watched monthly U.S. jobs report which could point to further hefty interest rate hikes.

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 109.438, after climbing to 109.602 overnight, the highest level in 20 years.

The U.S. August nonfarm payroll release is due at 08:30 ET (12:30 GMT) and is expected to show that 300,000 jobs were added last month, while the unemployment rate is seen remaining at 3.5%.

While this would represent a slowing in job growth from July’s 528,000, it would still mark the 20th straight month of job growth and likely support a continuation of aggressive rate hikes from the Fed to the benefit of the dollar.

Futures markets have priced in as much as a 75% chance the Fed will hike by 75 basis points at its September policy meeting.

"Given the experience over the last month and the very hawkish speech of Fed Chair Jerome Powell last Friday, we doubt that even a modestly softer August jobs report … will be enough to dent this Fed pricing or the dollar," said analysts at ING, in a note.

This expectation of further Fed interest rate hikes has been reflected most acutely in the USD/JPY pair, as traders increasingly see a widening interest rate gap.

USD/JPY traded largely flat at 140.19, moving above the key 140 area for the first time since 1998, increasingly putting pressure on Japanese officials to support its beleaguered currency.

Elsewhere, EUR/USD rose 0.3% to 0.9977, after falling below parity on Thursday as a survey showed that manufacturing activity across the Eurozone declined again last month with energy costs soaring.

The euro has received some support ahead of next week’s European Central Bank meeting, as the bank is widely expected to lift interest rates by a hefty 75 basis points next week after Eurozone CPI climbed to a new record in August.

GBP/USD rose 0.2% to 1.1561, just above a new multi-year low after falling below 1.15 overnight as the U.K. economy heads towards a likely prolonged recession while the government struggles with a deteriorating balance sheet.

"A fiscal risk premium looks to be going into GBP. Cable retesting the March 2020 flash-crash low of 1.1415 low looks the path of least resistance," said ING.

USD/CNY fell 0.1% to 6.9022, with the yuan remaining under pressure following the fresh COVID-19 lockdown measures in Chengdu.