LONDON (Reuters) - The euro
slipped on Monday, testing a 22-month trough against the
British pound, after weak German industrial data
highlighted the divergent economic prospects between the
euro zone and those of its biggest trading partners.
German industrial output fell 1.8 percent on the month in May, its
biggest drop in more than two years, surprising most analysts, who
had forecast an unchanged reading.
The weak data kept alive expectations that the European Central Bank
may need to loosen monetary policy further in coming months in the
face of disinflationary pressures and subdued economic growth.
ECB policymaker Benoit Coeure said at the weekend that rates will
remain very low for a long time, regardless of developments in the
rest of the world.
In contrast, the Bank of England is expected to tighten policy
either before the end of this year or early next year. Investors
have also brought forward their view on the timing of the first rate
hike by the U.S. Federal Reserve to mid-2015 after a stellar jobs
report last week.
That helped the dollar index trade near its highest in nearly two
weeks, at 80.359. The euro was down slightly at $1.3590, having
fallen to $1.3576 earlier in the European session, its lowest since
July 26. It fell to a 22-month low against the pound of 79.14 pence
after the German data, but recovered to trade at 79.35 pence.
"The German data was a bit weak and in line with recent euro zone
data. This will add to selling pressure in the euro in the near
term," said Yujiro Goto, currency analyst at Nomura.
He expected euro/dollar to drift lower, especially in light of last
week's U.S. jobs data. The strong non-farm payrolls report prompted
traders to slightly increase bets that the Fed will lift rates in
June next year.
Most traders, though, are cautious about adding to long dollar bets,
aware that Fed policymakers will probably err on the side of caution
or wait for wage inflation to pick up before hiking interest rates.
FED MINUTES IN FOCUS
Fed minutes, due to be released later this week, should shed more
light on how the debate within the rate-setting committee is shaping
up, traders said.
"The FOMC minutes this week could reveal how the Fed views the
recent rise in inflation and stronger data. The risk is that there
is a divergence between the doves and the hawks on the committee,"
Morgan Stanley analysts said in a note.
"With (Fed chair Janet) Yellen staying firmly dovish, the minutes
may reflect this and has a chance to put the dollar under pressure."
The dollar's failure to make much headway has been the big
disappointment on currency markets this year. Most traders say that
unless two-year Treasury yields rise sharply, the dollar, which has
a good correlation to U.S. yields, is unlikely to push much higher.
The dollar fell against the yen to 101.90 yen, after having risen
0.7 percent last week. The euro also shed 0.2 percent to trade at
138.51 yen with falling stock markets offering the safe-haven yen
Sterling, however, slipped against the dollar to $1.7125, off last
week's six-year high of $1.7180. The Canadian dollar, also in favour
at the moment, stood at C$1.0643 per USD, just off a six-month high
of C$1.0620 struck on Thursday.