Euro slips to seven-week low on transatlantic policy divergence

LONDON: The euro slipped to a seven-week low on Thursday, as investors bet that monetary policies will diverge in the euro zone, where interest rates look set to stay at record lows throughout 2018, and the United States, where as many as four hikes are expected.

The dollar strengthened across the board, hitting a six-week high against a basket of major currencies after Jerome Powell struck an upbeat note on the U.S. economy on Wednesday during his first public testimony as Federal Reserve chief.

In contrast, soft inflation data in the euro zone on Wednesday dented expectations that the European Central Bank (ECB) will dial back its stimulus this year, driving the euro to a six-month trough against the yen in Asian trading on Thursday.

Data showing the currency bloc's manufacturing boom slowed a little further last month added to the downbeat mood, helping send the euro to as low as $1.2162, its weakest since Jan. 12.

"At the start of the year we had a lot of excitement about the strength of growth, and we had a lot of speculation that the ECB was going to taper more aggressively -- people were even talking about hikes at the end of the year," Rabobank currency strategist Jane Foley said.

"A lot of that has just fallen off the scene and there's a bit more of a pragmatic outlook for what the ECB is likely to do, which is maybe a rate hike in 2019, which is still some way away. If we layer that on top of the U.S. story, there is a contrast," she added.

The dollar index climbed to 90.868, with Powell's optimism on the economy in public testimony to Congress suggesting the U.S. central bank is going to raise interest rates one more time than the three hikes markets had expected.

"Hawkish comments from Powell have fuelled market speculation of the Federal Reserve raising U.S. interest rates four times this year -- ultimately supporting the dollar," said Lukman Otunuga, Research Analyst at FXTM.

"Market expectations of higher U.S. rates could intensify further if the new Fed head doubles down on hawkish comments."

Powell will continue his testimony later in the day.

The dollar index is still down 1.5 percent this year, dogged by suspicions that the Trump administration prefers a weaker dollar to mend its bulging trade deficit. Worries that Trump's big tax cuts and spending plans may boost fiscal deficits to the extent that they undermine confidence in U.S. debt have also dragged on the greenback.

The Australian dollar hit a two-month trough versus the dollar and a nine-month low versus the yen after data on Australian business investment missed forecasts.

The Aussie traded 0.5 percent down at $0.7725, having briefly fallen to as low as $0.7717.