The euro gained a third of a percent against the dollar on the back of marginally better economic numbers on Monday, showing some resilience ahead of the launch of outright money-printing by the European Central Bank. The Australian dollar was the biggest loser, down almost one percent against the euro, on speculation that China's weekend cut in interest rates had increased the probability of a second reduction in as many months by the Reserve Bank of Australia on Tuesday.
Dealers and analysts in London, where 60 percent of the world's currency trade is done, said the main theme of the next week would be how markets will deal with the launch of the ECB's bond buying programme. The bank is expected to lay out more details of the programme, due to start this month, at a news conference on Thursday, and the euro has fallen to its lowest in five weeks in the run-up.
Bolstered by better purchasing manager surveys out of Germany and Italy, as well as a slightly smaller fall in the first estimate of February inflation, it was up 0.3 percent at $1.1230 by 1200 GMT. "I think this could well be coming from the data this morning, but any rebounds at this point will be quite limited," said Ian Stannard, head of European FX strategy with Morgan Stanley in London.
"After the change in tone by (US Federal Reserve chief) Janet Yellen last week, it looks like the market wants to be positive on the dollar." Major banks that have backed the dollar to head closer to parity with the euro over the next year have been more cautious through a month of choppy trading, but now largely seem to be predicting another rise. "Be it US or Chinese data that is the trigger, the euro right now is vulnerable," said Jane Foley, a strategist focused on G10 major currencies at Rabobank in London.
"There is a conviction that it will be foreigners who are going to sell bonds to the ECB rather than euro zone investors, and that should have a negative effect on the euro." The dollar rose to as high as 95.505 against a basket of major currencies, its highest level since September 2003, before retreating to 95.157, down 0.15 percent on the day.
Against the yen, it was up 0.2 percent on the day at 119.75 yen, having hit a two-week high of 119.965 yen. It reached a two-year high against China's yuan after the rate cut. Many analysts had been convinced that Australia's Reserve Bank would hold fire on another rise in interest rates this week but the signs of concern over the pace of Chinese growth are just the latest in a run of poor economic news.
"Rate cuts by the People's Bank of China over the weekend are a further sign of relative weakness in China's economy and a further sign that monetary policy globally is typically being eased outside of the United States," ANZ said in a note, predicting a cut on Tuesday.
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