The euro came off a two-month high on Tuesday as the eurozone rescue fund's first offer of debt attracted strong demand as expected, while the pound dived after a shock contraction in the UK economy last quarter. Speculation about potential interest rate increases in the eurozone and Britain eased as the poor UK GDP data switched investors' focus to worries about growth rather than inflation.
The order book for the European Financial Stability Facility's (EFSF) inaugural debt issue closed with bids valued at 43 billion euros for the 5 billion euros of paper on offer, a source at the EFSF said. Speculation the new issue would be massively oversubscribed boosted the euro in early trade, but it was unable to extend gains on the results as they did little to increase optimism for a comprehensive solution to eurozone debt problems.
By 1149 GMT, the euro was trading 0.1 percent lower at $1.3635, easing from an earlier high of $1.3688 on trading platform EBS. Traders cited selling by macro funds, a German bank and Asian central banks. Initial support was seen around $1.3585, a key trendline off the January lows, traders said. Sterling tumbled after a surprise 0.5 percent contraction in fourth quarter UK GDP due to adverse weather, compared with economists' forecasts of a 0.5 percent gain.
The pound fell as much as 1.4 percent against the dollar to a session low of around $1.5750. The euro rose to 86.36 pence, its highest in three weeks. The dollar index rose 0.1 percent to 78.14, coming off a 2-1/2 month low of 77.814 hit on Monday. The dollar was down slightly at 82.35 yen, unaffected after the Bank of Japan kept its policy unchanged as expected. The Australian dollar eased versus the US dollar as risk appetite receded and on lower-than-expected Australian consumer inflation data. Some economists said the surprisingly poor reading suggested the Bank of England would be much more cautious about the threat of lasting inflation, which would weigh down the UK currency.