Euro underpinned by upbeat economic outlook; dollar nurses losses

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

By Masayuki Kitano

SINGAPORE (Reuters) – The euro eased on Wednesday to take a breather from a rally prompted by optimism over the euro zone’s economy and expectations the European Central Bank will wind down its bond-buying stimulus in 2018.

The euro slipped 0.1 percent to $1.2048 . The currency hit a four-month high of $1.2081 on Tuesday, marking a gain of roughly 3 percent from a mid-December trough and bringing it close to a September high of $1.2092, the currency’s highest level since early 2015.

It was boosted by data showing euro zone manufacturers ended 2017 by ramping up activity at the fastest pace in more than two decades as rising demand suggested they will start the new year on a high.

The euro was also supported by expectations for a shift in ECB monetary policy this year.

The ECB board member in charge of the central bank’s market operations, Benoit Coeure, said at the weekend that he saw a “reasonable chance” bond purchases would not be extended beyond September.

ECB rate-setter Ewald Nowotny told a German newspaper in an interview that the ECB may end its stimulus programme this year if the euro zone economy continued to grow strongly.

“It’s this monetary policy normalisation everywhere that’s playing catch-up to the Fed, and that’s why the dollar is weak,” said Heng Koon How, head of market strategy for United Overseas Bank in Singapore.

The against a basket of six major currencies held steady at 91.902 (), having pulled up from Tuesday’s 3-1/2 month low of 91.751.

Later on Wednesday, investors will turn their attention to the minutes of the Federal Reserve’s December policy meeting, when it raised interest rates for the third time in 2017.

Further cues are likely from U.S. economic data this week, including jobs figures on Friday.

“One key is whether the Fed minutes and U.S. jobs data will prompt the U.S. 10-year bond yield to clearly rise above 2.5 percent,” said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore, which would boost the dollar.

The U.S. 10-year Treasury yield () was 2.465 percent at the close of U.S. trade on Tuesday, below a nine-month high of 2.504 percent on Dec. 21.

Commodity-linked currencies took a breather from a rally spurred in recent weeks by higher metal and oil prices.

The Canadian dollar last stood at C$1.2521 per U.S. dollar. It briefly rose to C$1.2500 early on Wednesday, matching Tuesday’s peak and its highest level since Oct. 20.

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