Euro struggles at 11-month low as dollar reigns supreme

Some reassuring data from Germany eased pressure on the struggling euro today after speculation of an earlier rate rise from the Federal Reserve had pushed the dollar to an 11-month high.

Share markets had been feeling flat following a disappointing survey on Chinese manufacturing overnight but they too got a lift from the news that Germany’s private sector grew for a 16th month running in August.

It suggested Europe's largest economy could see a solid rebound in the third quarter after its surprise contraction in the second, though the optimism was again tempered by further signs of stagnation in neighbour France. Europe's pan-regional FTSEurofirst 300 share index rose 0.45 per cent, the euro hit its highest level of the day and bond yields in the region nudged up as the data dovetailed with firming expectations of US rate rise within the next year.

A composite of PMI data from across the euro zone showed private business growth slowed more than expected this month, despite widespread price cutting, but markets were focusing on the positive news from Germany.

"Even though the direction (of German PMI data) was lower the picture is still one of moderate recovery," said ABN Amro economist Nick Kounis. "The market was positioned for something a bit weaker. We had the fall in Q2 GDP, the share drop in the ZEW survey and bond markets are starting to price in QE and deflation, so that tells a story."

The euro rose to $1.3273 after the numbers having crumbled to an 11-month trough of $1.3243 overnight as investors had detected a hawkish turn in policy discussions at the Federal Reserve.

Yields on short-term US debt had leapt by the most since March as minutes of the central bank’s last meeting led markets to price in a greater risk of an earlier hike in interest rates.

The US dollar index, which measures the greenback against a basket of six major currencies, steadied at 82.217 having broken decisively higher to 82.332 overnight. The dollar also notched up a four-month peak against the yen at 103.96 . "Our takeaway is that the median FOMC participant has been surprised by how quickly the unemployment rate has come down and is also less convinced there is as much slack in the labor market as previously believed," said Michelle Girard, chief economist at RBS. "So the hawks are getting restless and the centrists seem to be less dug-in on some of their previously held views."

Reuters