© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

By Dhara Ranasinghe

LONDON (Reuters) -The euro fell to its lowest level since mid-June on Friday, held back by growing expectations the European Central Bank could soon pause rate hikes, while a buoyant dollar lost some momentum before a speech by Federal Reserve Chair Jerome Powell.

ECB policymakers are increasingly worried about weakening growth prospects and, while the debate is still open, momentum for a pause in its interest rate increases is building, Reuters reported, citing eight sources with direct knowledge of the discussion.

The mood among German businesses deteriorated more than expected in August, data showed, falling for the fourth month in a row and adding to fears that the economy may be heading for its second recession inside a year.

The euro hit its lowest since mid-June at around $1.0766 before drifting higher. It was last down just 0.13% on the day.

The , which measures the U.S. currency against six others, rose to 104.31, the highest since June 6, but edged lower during London trade. It was last down 0.1% at 103.98 — suggesting some caution among traders ahead of Powell’s speech.

Powell speaks at the Jackson Hole Economic Policy Symposium at 1405 GMT, while ECB chief Christine Lagarde speaks at the same gathering later in the day.

“Powell will maintain that the Fed will keep a hike in play, while markets are less convinced about further ECB tightening,” said Jeremy Stretch, head of G10 FX strategy at CIBC in London.

“It still feels like the path of least resistance is for a stronger dollar.”

Both the euro and sterling have been hit this week by weak business activity data that has prompted investors to scale back bets on further rate hikes in the euro area and Britain.

Sterling touched its lowest level since June at around $1.2560 before recovering to around $1.2610 to trade just a touch softer on the day.

It is down roughly 1% this week and set for its biggest weekly drop in five weeks.

In contrast, the dollar index is on course for its sixth straight week of gains, aided by signs of resilience in the U.S. economy that has bolstered the case for rates staying higher for longer.

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits fell last week, as labour market conditions remained tight.

Money market pricing suggests the Fed’s key rate will stay above 5% through June 2024, with about 100 basis points of rate cuts in the second half. The market in early August was betting on about 130 basis points of cuts next year.

“The market appears to be going into Powell’s speech with a hawkish bias and the odds of a hike next month have crept up to slightly more than 20% from about 10% at the end of last week,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

The yen weakened 0.2% to 146.10 per dollar as the Asian currency straddled the level at which Japanese authorities intervened last year, keeping traders on their toes for signs of similar moves this time.