LONDON, May 18 Reuters The U.S. dollar edged higher on Wednesday, a day after posting its biggest singleday drop in more than two months after U.S. Federal Reserve chief Jerome Powell struck a more hawkish tone as the central bank battles to rein in surging inflation.

Powell pledged that the U.S. central bank would ratchet up interest rates as high as needed, including taking rates above neutral, to kill a surge in inflation that he said threatened the foundation of the economy.

The neutral rate is the level at which economic activity is neither simulated nor constrained and is widely expected at somewhere in the region of 3.5 by mid 2023.

It39;s a strong reminder to the market that the Federal Reserve is going to be hiking interest rates, probably at a very accelerated pace, in order to regain their credibility on the inflation front, said Jane Foley, head of FX at Rabobank.

The hawkish Fed is the reason why sentiment this morning looks a little bit more fragile than it did yesterday.

At 1055 GMT, the U.S. dollar index was up 0.3 at 103.57, after earlier touching a twoweek low following Tuesday39;s 0.9 drop. It hit a twodecade high above 105 last week.

The euro briefly dropped below 1.0500 , reversing an earlier rise to a oneweek high, a day after European Central Bank policymaker Klaas Knot said a 50 basis point rate increase in July was possible if inflation broadens. 

Knot is one of the more hawkish ECB members, Commerzbank analysts noted, adding that his…