By Peter Nurse

Investing.com - The U.S. dollar edged lower in early European trade Wednesday, with the euro seeing some demand ahead of this week’s important European Central Bank meeting.

At 02:40 AM ET (0640 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 106.517, well off its two-decade peak of 109.29 seen last week.

Greater risk appetite, as shown by stock market gains, has seen the dollar head lower this week, with this weakness coinciding with reduced expectations of a hefty 100-basis-point rate hike at next week's Federal Reserve policy review after comments from two of the most hawkish FOMC members – James Bullard and Chris Waller – that their base case was still a 75 basis point move.

On the flip side, the euro has bounced after briefly breaking parity with the dollar for the first time in two decades last week.

EUR/USD edged 0.1% higher to 1.0235 Wednesday, after rising 0.75% during the previous session, its strongest daily gain in a month.

Traders are focusing on Thursday’s European Central Bank meeting, where Reuters reported that the policymakers are considering raising interest rates by a larger-than-expected 50 basis points after signaling a 25 basis point increase in June.

Helping the euro’s tone have been Reuters reports that Russia is expected to resume gas flows to Germany via the Nord Stream 1 pipeline on time on Thursday after the completion of scheduled maintenance, reducing fears of an energy crisis on the continent.

“If Moscow refuses to turn on the gas tap, the specter of the EU scrambling for gas supplies could unnerve the markets and send the euro lower,” said Kenny Fisher, an analyst at OANDA.

GBP/USD rose 0.1% to 1.2003 after British consumer price inflation surged to an annual rate of 9.4% in June, the highest rate since early 1982.

Bank of England Governor Andrew Bailey said on Tuesday that a 50-basis-point rate hike will be "among the choices on the table" at the central bank's next meeting. The bank has already raised borrowing costs five times since December.

AUD/USD rose 0.1% to 0.6902 after minutes from the Reserve Bank of Australia’s July meeting showed that the central bank sees a need for more policy tightening to curb inflation.

USD/JPY rose 0.1% to 138.32 ahead of the Bank of Japan’s meeting on Thursday where the central bank is widely expected to keep monetary stimulus unchanged.

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