Euro pressured by German growth worries, dollar holds firm tone

© Reuters. Illustration photo of U.S. Dollar and Euro notes

By Daniel Leussink

TOKYO (Reuters) – The euro nursed losses against the dollar on Thursday after dipping to a 22-month low on a surprise drop in a leading indicator for economic activity in Germany, amplifying worries of a growth slowdown in Europe’s largest economy.

German business morale deteriorated in April, bucking expectations for a small improvement, a business index by the Munich-based Ifo economic institute showed on Wednesday, as trade tensions weighed on the German economy, leaving domestic demand to support slowing growth.

The greenback rallied to a 23-month high of 98.189 against a basket of key rivals overnight after gaining more than half a percent, largely propelled by the euro’s weakness. The index last traded slightly lower at 98.096.

“Yesterday’s strength of the dollar was exaggerated by the weakness in countries other than the U.S.,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“A big question is if the weakness in Australia and the euro area are temporary or not,” he said. “The main scenario is (for) a recovery in the second half of this year in the euro area and other regions.”

The euro sat at $1.1153, having suffered its biggest one-day loss against the dollar since early March when the European Central Bank pushed back plans for its first post-crisis interest rate hike.

The single currency also shed nearly 0.4 percent against the yen overnight and was last trading at 125.125 yen.

The Japanese currency slipped to a 2019 low of 112.40 yen per dollar on its own during the previous session, with traders eyeing a Bank of Japan policy decision later on Thursday for trading cues.

The BOJ is expected to keep monetary policy steady on Thursday and predict that inflation will fall short of its 2 percent target for three more years, signaling that its massive stimulus will stay in place for the foreseeable future.

The dollar was last a shade lower on the yen, changing hands at 112.12 yen.

The Australian dollar was largely unchanged at $0.7017.

The had given up nearly 1.3 percent during the previous session after weaker-than-expected Australian inflation numbers heightened the prospect of an interest rate cut.

The Canadian dollar was flat at $1.3495 after hitting a four-month low overnight, as investors raised bets on a Bank of Canada interest rate cut this year after the central bank slashed its economic growth outlook.

Market participants awaited policy decisions by the Swedish and Turkish central banks later on Thursday.

Sweden’s Riksbank is likely to keep its benchmark rate unchanged and may be forced to delay plans to tighten policy later in 2019, a Reuters poll of analysts published on Tuesday showed.

“The Riksbank may push further out the timing of the next rate hike, and also the market may speculate it’s too early for a rate cut by the Turkish central bank,” said Mizuho’s Yamamoto.

“That could be a negative for these currencies and positive for the dollar.”

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