(Reuters) - The euro rallied against the U.S. dollar on Wednesday, reversing a drop to a near three-week low earlier in the day, as optimism that Italy can resolve its political gridlock offset weak German data.
The euro had
fallen after a survey by Germany's Ifo think-tank showed business sentiment
dropped for a second month in April, fueling concerns about the health of the
euro zone's largest economy and fanning speculation that the European Central
Bank will cut rates soon.
The euro was already vulnerable after German
purchasing managers' index data on Tuesday showed business activity dropping
sharply in April.
"The release of softer IFO data from Germany drove a
brief decline in the euro, albeit one that was quickly retraced," said Eric
Theoret, forex strategist at Scotiabank in Toronto.
The euro dropped to
$1.2954, its lowest since April 5, before recovering to trade at $1.3019, up 0.2
percent. An Asian central bank and a supra-national investor were cited as
buyers earlier in the global trading day.
"With regards to the outlook
for the ECB, focus has turned to next Thursday's meeting, with rising
expectations for an easing in monetary policy," Theoret said.
European Central Bank currently has rates at a record low 0.75 percent.
Recent comments by ECB policymakers have stressed declining inflation
and poor euro-zone growth prospects, suggesting policymakers are leaning toward
a further cut at their next meeting on May 2. The ECB has room to act on
interest rates if economic conditions remain weak, ECB Vice President Vitor
Constancio said on Wednesday.
With interest rates in the United States
and Japan at or near zero, an ECB rate cut would diminish the euro's advantage.
The ECB, however, has refrained from pumping massive amounts of money into the
euro zone through asset purchases, unlike the Federal Reserve or the Bank of
And investors may view an ECB rate cut as positive for
the euro because the central bank is taking action to stimulate economic growth.
Traders said the euro drew some support from reports that Italian
President Giorgio Napolitano had called on Enrico Letta, deputy head of the
centre-left Democratic Party, to form a new coalition government.
formation of a government in the euro zone's third-largest economy after months
of uncertainty would offer relief to investors looking to buy assets in the
"But the risk-reward in the euro is to sell it into any rise to
$1.3100/50," said Mankash Jain, head of foreign exchange and investment
management at hedge fund Solo Capital in London. "The data from Germany has been
weak, the Ifo was weak, and if the ECB were to cut rates next week, the euro
DOLLAR WEIGHED BY WEAK U.S. DATA
The U.S. dollar
was little changed against against the yen in a volatile session after data
showed orders for long-lasting U.S. manufactured goods, known as durable goods,
recorded their biggest drop in seven months in March and a gauge of planned
business spending rose modestly, adding to signs of a slowdown in factory
While the yen remains weighed by the Bank of Japan's ambitious
bond-buying program announced this month, concerns about global growth have
lifted the currency recently.
The dollar hit a four-year high of 99.94
yen on April 11 after the Bank of Japan unveiled a sweeping monetary stimulus
program that entails buying $1.4 trillion of bonds in less than two years.
The dollar last traded at 99.45 yen, little changed on the day.
Many traders are braced for a test of the 100-yen mark in coming days,
although offers were reported around 99.80-85 yen that could limit the dollar's
gains in the short term.
"Price action this week can be characterized as
'sideways,' best displayed by the euro/dollar's inability to shake $1.3000, or
the dollar/yen's inability to break through 100 yen," said Christopher Vecchio,
currency analyst at DailyFX in New York. "There's significant event risk coming
up over the next week that should keep price action relatively contained until
the events come to pass: the Bank of Japan meeting on Friday, the U.S.
first-quarter GDP release on Friday, and the European Central Bank meeting next
Some USD5.18 billion in euros changes hands on
Wednesday,using Reuters Dealing data, compared with USD4.23 billion on Tuesday.
USD2.59 billion in yen trades, compared with USD3.164 billion on Tuesday, using
Reuters Dealing data.