The euro hit a 22-month low against the dollar on Thursday on the prospect of diverging monetary policy between the Federal Reserve and the European Central Bank as rate differentials swing decisively in the greenback's favor.
The common currency fell to $1.2730 on trading platform EBS, its lowest since November 2012, and was down 0.3 percent on the day. The dollar index hit a new four-year high.
The latest drop came as yield differentials between US 10-year Treasuries and their German counterparts traded near 15-year highs, driving more investors to buy the dollar.
A recent batch of economic data has also highlighted the diverging economic outlook for the euro zone and the United States. While German business sentiment fell again in September to its lowest level in nearly 1-1/2 years, sales of new U.S. single-family homes surged in August to their highest level in more than six years.
ECB President Mario Draghi kept alive expectations of more policy steps in the euro zone, including the possible use of sovereign bond purchases, also known as quantitative easing (QE), to revive the region's stalled economy.
Draghi told the Lithuanian business daily Verslo Zinios the ECB was ready to use additional unconventional instruments or change the size of current asset purchase programmes if it became necessary to address risks of very low inflation.
"ECB President Mario Draghi continues to beat the QE drums ... so hardly surprising that euro/dollar is trading at even lower levels this morning," said Esther Reichelt, currency strategist at Commerzbank.
The euro's losses took the dollar index to a fresh four-year high of 85.342, leaving it on course to record its 11th consecutive weekly gain. Traders said the dollar was likely to be bid as the Fed looks to end its QE programme next month, with the mounting yield gap set to underpin it in the near term.
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