The euro fell on Thursday as optimism about policymaker action to address the eurozone debt crisis waned, while the Australian dollar gained after a drop in Chinese inflation raised the chances that China will act to stimulate its economy. The euro fell 0.5 percent to $1.2306, well below a one-month high of $1.2443 set on Monday, with traders citing eastern European accounts selling. They said it could extend losses if it breaks below stop-loss sell orders through $1.2290.
It also struggled against Scandinavian currencies as some investors who are anxious about the crisis and the region's sluggish growth prospects sought safer and better quality alternatives. "The euro is finding it increasingly tough to rise above $1.24 given some of the optimism that policymakers can find a solution to the crisis is fading," said Jane Foley, senior currency strategist at Rabobank. "It will be interesting to see if investors have the appetite to hold it above $1.2350."
Recent gains in the euro looked to be stalling, with the currency also pulled down by recent weak euro zone economic data. European Central Bank President Mario Draghi said last Thursday that the euro was irreversible and indicated it was ready to act to support the euro zone, and warned markets not to bet against the currency.
Since then the euro has recovered from last week's low of around $1.2133 as investors have anticipated that the ECB will eventually resume its bond-buying programme to reduce sky-high Spanish and Italian borrowing costs. But the ECB said in its monthly bulletin released on Thursday that there were downside risks to the euro zone's economic outlook with financial market tensions and their potential impact on the real economy posing the main concerns.
"August will be quiet generally and the euro will trade in reasonably tight ranges ... There will be no major policy signals until the ECB has put together its bond-buying programme," said Adam Cole, global head of currency strategy at RBC. The euro hovered just shy of 12-year lows against the Swedish crown and was weak near a 9-1/2 year trough against the Norwegian currency.
Sweden's finance minister Anders Borg said on Thursday the Swedish economy had performed better than expected in the face of the euro zone debt crisis and the government may raise its growth forecast. The euro was down 0.1 percent against the Swedish crown at 8.2568 crowns, bringing it very close to a low hit on Wednesday of 8.2550. The Norwegian crown has also benefited from Norway's economy performing well, helped by firmer crude oil prices.
Rabobank's Foley said diversification flows from central banks seeking alternatives to euro zone assets would continue to aid Scandinavian currencies. The higher-yielding and growth-linked Australian dollar also gained, trading up 0.1 percent at $1.0573, having earlier hit $1.0615, its highest since March 20. Data showed China's annual consumer inflation fell to a 30-month low in July, suggesting the country's central bank has room to follow up interest rate cuts in June and July to stimulate the economy. The dollar edged down against the yen to trade at 78.34 yen.