By Peter Nurse

Investing.com - The U.S. dollar edged lower in early European trade Thursday, with the euro rebounding ahead of the latest European Central Bank rate decision, which is expected to result in another aggressive increase.

At 02:55 ET (06:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 109.630, retreating from Wednesday’s peak of 110.79, a level not seen since June 2002.

The euro makes up over 50% of the dollar index, and EUR/USD traded largely unchanged at 0.9996, climbing back towards parity after hitting a 20-year low of 0.9863 earlier in the week.

The ECB is set to make its latest policy announcement at 08:15 ET (12:15 GMT), as is widely expected to raise rates significantly to fight runaway inflation, even as the risk of a Eurozone recession rises.

The debate is over the size of the hike, with consensus moving towards an increase of 75 basis points, following the lead of the U.S. Federal Reserve, with the central bank seen as having limited time to try and wrest back control over record inflation before growth in the region stalls.

ABN Amro expects the ECB to raise policy rates by 75 basis points, saying "headline inflation has continued to accelerate, while the drivers of price pressures have generally been more elevated than the ECB expected in June."

Additionally, "GDP in the first half of this year has come in higher than the central bank expected."

Still, despite these euro gains, the dollar remains well-supported with the Fed widely expected to also hike by 75 basis points later this month.

Attention will be on comments from Federal Reserve Chair Jerome Powell at a Cato Institute conference later in the session, with Fed officials soon due to enter into a blackout period prior to the U.S. central bank's Sept. 20-21 meeting.

Goldman Sachs now expects a 75 basis point hike this month, up from its previous forecast of 50 bps, saying Federal Reserve officials have been sounding hawkish recently.

The influential investment bank also raised its November forecast from 25 bps to 50 bps and sees the Fed Funds rate window at 3.75-4% by year's end.

GBP/USD fell 0.2% to 1.1505, heading back toward the previous day's 37-year low of 1.1405, while AUD/USD fell 0.2% to 0.6754 after RBA Governor Philip Lowe hinted at a slower pace of increase in interest rates going forward.

Elsewhere, USD/JPY traded largely unchanged at 143.69, after reaching a 24-year high of 145.00 in the previous session.

The yen has suffered from its sensitivity to rising long-term U.S. yields as traders positioned for more hefty Fed interest rate hikes, falling more than 3% over the past two sessions.