By Peter Nurse

Investing.com - The U.S. dollar resumed its seemingly relentless march higher in early European trading Thursday, while sterling slumped as the relief rally attached to the Bank of England’s intervention into the bond market dissipated.

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.8% to 113.438, rebounding close to its recent two-decade high of 114.653 after its worst session in more than two years.

The Bank of England announced an emergency bond-buying on Wednesday, attempting to shore up the gilt market which had slumped, along with the pound, after the new U.K. government announced substantial tax cuts, likely funding by hefty borrowing.

The British currency jumped the most since mid-June as a result, but this bounce hasn’t lasted long, with GBP/USD dropping 0.9% to 1.0787 on Thursday.

This will put pressure on the BoE to announce a substantial interest rate hike at its next meeting in early November, if it continues to rule out an emergency hike, in order to support the beleaguered pound.

"Markets are now pricing a terminal rate above 6% next year, and while we can debate whether this is a reliable gauge of expectations with this level of market stress, it’s no doubt true that investors are positioning for a sizable reaction," analysts at ING said, in a note.

Appearances from Bank of England officials David Ramsden, Silvana Tenreyro, and Huw Pill later on Thursday will be closely watched.

EUR/USD also fell 0.7% to 0.9667, as the U.S. dollar regained its footing after the previous session’s losses.

The single currency is also weighed by the recent escalation of the Eurozone's energy crisis, with Sweden's coast guard announcing it has discovered a fourth gas leak on the damaged Nord Stream pipelines.

The European Union suspects sabotage was behind the leaks on the pipelines carrying gas from Russia to Europe and has promised a "robust" response to any intentional disruption of its energy infrastructure.

"The attack presents a pure geopolitical event - with investors awaiting how both the West and particularly the Russians respond," said analysts at ING.

USD/JPY rose 0.4% to 144.69, remaining near the crucial 145 level, while the risk-sensitive AUD/USD fell 0.9% to 0.6466, after a new monthly measure of Australian consumer prices on Thursday showed annual inflation eased slightly in August from July.

USD/CNY slipped slightly to 7.1983, with the yuan remaining near its weakest level since the 2008 financial crisis despite the People's Bank of China attempting to boost the currency. It said on Wednesday that stabilising the foreign exchange market is the top priority.