By Hannah Lang

WASHINGTON (Reuters) – The euro fell and the dollar rose on Wednesday after U.S. Federal Reserve Chairman Jerome Powell said the biggest risk to the U.S. economy is persistent inflation and not that interest rate hikes will slow the economy too much.

Speaking at the European Central Bank Forum in Sintra, Portugal, Powell noted that engineering policy tightening to avoid a U.S. recession is certainly possible but not guaranteed.

“Powell, to me, sounded quite hawkish. He was talking about wanting to preempt or get ahead of any deanchoring or unwanted rise in inflation expectations,” said Erik Nelson, a currency strategist at Wells Fargo (NYSE:WFC) in New York.

“I think that’s maybe a bit of a departure from the perception of the market in the past few months that they would react to higher inflation expectations, and it seems if anything that they’re going to be proactive rather than reactive.”

The dollar index, which measures the greenback against six currencies, ticked up 0.593% to 105.070 as investors sought safety in U.S. assets with stocks falling globally on the mounting risk of recession. The dollar index stayed, however, below the two-decade high of 105.79 struck two weeks ago.

The Japanese yen climbed to 137.0 against the euro, its highest level since 1998, before paring gains. The Japanese yen weakened 0.29% to 136.55 per dollar.

The latest moves indicate “a very strong bias to sell the yen,” said Nelson. “It all boils down to the Bank of Japan being the only central bank that’s not tightening.”

The euro was last down 0.74% at $1.044. The ECB is widely expected to raise interest rates in July for the first time in a decade, following its global peers, to cool accelerating inflation. Economists are divided on the magnitude of any hike, giving investors pause.

Lagarde said on Wednesday the era of ultra low inflation that preceded the pandemic is unlikely to return, and that central banks need to adjust to significantly higher price growth expectations.

Elsewhere, the Swiss franc peaked at 1.0034 versus the euro, the highest level against the single currency since 2015. It was last up 0.96% at 1.0024.

Cash held overnight by the Swiss National Bank fell last week by its largest amount in more than a decade, in a sign of the end of the central bank’s forex purchase campaign to weaken the Swiss franc.

In crytocurrencies, bitcoin last fell 0.72% to $20,107.70.

Ethereum last fell 4.39% to $1,109.25.

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