A survey by Germany's Ifo think-tank showed business morale dropped for a second month in April, fuelling concerns about the health of the euro zone's largest economy and fanning further speculation of an ECB rate cut.

The survey knocked the euro lower, with the single currency already vulnerable after German PMI data yesterday showed a sharp drop in business activity in April.

Investors focused on the possibility of a cut in the main ECB refinancing rate, which stands at a record low 0.75 per cent.

Recent comments by ECB policymakers have stressed falling inflation and poor euro zone growth prospects, suggesting policymakers are leaning towards a further cut at their next meeting on May 2nd.

"Already the PMI yesterday had given an impulse to the downside (to sell the euro) but some were waiting for the Ifo to confirm the economy is not really recovering," said Carolin Hecht, currency strategist at Commerzbank.

"Everyone is now really betting on the ECB to come to the stage and cut the key rate."

The euro dropped as low as $1.2954, its lowest level since April 5th, before paring losses to last trade down 0.2 percent on the day at $1.2980. Hecht said there would be support for the euro around $1.2950 and the 200-day moving average at $1.2940, but it could slide as low as $1.28 in the run-up to the ECB meeting. However, Mitul Kotecha, Hong Kong-based head of global foreign exchange strategy for Credit Agricole, said euro losses may be limited as many traders had already priced in the possibility of an ECB rate cut to some degree.

"Markets have moved around to the view that the ECB will cut rates. We're looking for a cut in May. So to some extent the euro is pricing that in," Kotecha said. 100

The euro edged down 0.1 per cent to 129.16 yen, well off a more than three-year high of 131.10 yen hit earlier this month.