Euro zone gloom lifts US dollar to six-month highs

The dollar climbed to six-month highs against the euro on Tuesday, boosted by a jump in US consumer confidence and expectations of euro-zone interest rate cuts as investors braced for a possible recession in the region. The euro tumbled versus the dollar earlier following a barrage of euro zone data suggesting economic weakness has spread beyond the United States.
The Ifo German business climate index in August fell more than expected to a three-year low. German gross domestic product shrank in the second quarter for the first time since 2004, while German consumer sentiment hit a five-year low.
In contrast, US economic data was less bleak. Consumer confidence rose in August, while the sales of newly constructed US single-family homes in July increased from an almost 17-year low in June. The reports fuelled further dollar buying.
"The dollar is higher versus the euro because euro zone data confirms weakness coming out of Europe and an overall global slowdown," said Kevin Chau, a currency strategist, at IDEAglobal in New York. "The US economy is still fairly weak but the rest of the world is catching up with it." In late afternoon trading, the euro was down 0.7 percent at $1.4642 after falling to a low of $1.4570 following the Ifo data, its weakest since mid-February.
The euro was down more than 6 percent so far this month and looks set for its largest monthly fall since its 1999 launch. The overnight index swaps market, meanwhile, has priced in about 46 basis points of rate cuts by the European Central Bank over the next year, analysts said, and investors could factor another 75 basis points of easing in the coming weeks. ECB interest rates are currently at 4.25 percent.
Currency investors took little notice of the Federal Reserve's minutes of its last meeting, which earlier this month saw a weakening economic outlook and financial market stress. The Fed said the outlook supported the case for steady US interest rates despite persistent inflation concerns. "The minutes appear to suggest that there is enough risk on both sides that the FOMC is likely to remain on hold for the balance of the year - barring another financial calamity," said Dustin Reid, senior currency strategist, at ABN Amro.