The euro bounced back from a 7-1/2-month low on Tuesday, as doubts crept in over whether the European Central Bank will deliver enough to push the euro down further at a meeting on Thursday, and after European economic data beat forecasts. The single currency has fallen almost 8 percent against the dollar over the past six weeks as expectations have grown that the ECB will add further stimulus to the euro zone at this week's meeting. In contrast, the US Federal Reserve is expected to raise interest rates later in the month.
That divergent policy outlook pushed the euro to $1.05575 on Monday, its weakest since April and around a cent away from a 13-year trough of $1.0457. But data showing unemployment in Germany hitting a record low, and euro zone manufacturing growth at a 19-month high, boosted the euro on Tuesday, which traded up 0.3 percent at $1.0594. Societe Generale currency strategist Alvin Tan, in London, said Tuesday's better-than-expected numbers had given the euro a boost, but that investors were also taking profit on the euro before Thursday's ECB meeting.
"There are a lot of expectations built into the meeting," he said. "So obviously there's a big question mark as to whether the ECB will be able to provide more of a surprise on top of the expectations." The dollar index, which measures the greenback against six major peers, had climbed to an 8-1/2-month high of 100.31 on Monday, within a whisker of a 12-1/2-year high, but it was 0.2 percent lower on Tuesday at 100.02.
Commerzbank currency strategist Thulan Nguyen, in Frankfurt, said the dollar move lower on Tuesday was mainly a technical correction, but that the greenback did not have that much higher to climb. "There is no case for much further dollar strengthening because the lift-off in December is pretty much priced in," she said. "(And) quite a lot of measures are already priced into the euro, which is why it has weakened over the last couple of weeks, and why (the dollar) is now stalling."
Moody's Analytics Chief Economist Mark Zandi told Reuters on Monday that the Fed would put up with further, but not unlimited, dollar appreciation. "The Fed realise that the dollar will continue to appreciate," he said. "Another 5 percent next year would be fine on a trade-weighted basis but much more than that and it will affect their ability to speed things up in 2017." The Chinese yuan eased 0.4 percent after the International Monetary Fund admitted the Chinese currency to its benchmark Special Drawing Rights basket.