The dollar resumed its decline on Thursday, shrugging off Fed Chair Jerome Powell's relatively confident comments on the US economy as survey figures suggested fears of a broadening economic weakness in Europe could be exaggerated.
The single currency popped a fifth of a percent higher after German retail sales contracted by less than expected while a swathe of PMI surveys from Germany to Spain was broadly within expectations. And "The data showed that manufacturing PMI data last month may have overstated the weakness in Europe and that might end up supporting the euro around current levels," said Derek Halpenny, European head of global markets at MUFG based in London.
The euro gained a fifth of a percent to $1.1219 but was still within sight of a two-year low of $1.1110 hit last week. Weak manufacturing survey data and cautious comments from European Central Bank policymakers in April prompted investors to amass large short positions to the tune of a net $14.8 billion in the week to April 23. The euro's tiny gains in quiet trading were in contrast to overnight volatility in the greenback after a surprisingly sharp retreat in the ISM index of manufacturing and downgrades to the US inflation outlook prompted investors to sell the US currency and push Treasury yields lower.
It subsequently recovered when Fed Chair Jerome Powell said the factors dragging on inflation might be "transitory" and he saw no case for a rate move in either direction. As a result, the dollar was half a percent above overnight lows against a basket of its rivals while 10-year Treasury yields were seven basis points above overnight lows.
"Powell is seeing the glass half full," said Konstantinos Anthis, Dubai-based head of research at ADSS."What's more important though is that he made it clear that he sees no case for easing interest rates, which of course will not make President Trump happy at all." Still, interest rate futures markets are pricing in a 64 percent probability of a rate cut by the end of the year though that probability might change after monthly jobs data due on Friday and US inflation data next week.
Sterling held below a two-week high on Wednesday on speculation that Brexit talks between the British government and the main opposition party were making some progress. The pound was last at $1.3054, having been as high as $1.3101 overnight ahead of a Bank of England rate decision where the central bank is widely expected to hold fire but its comments might shift future rate expectations.