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Euro Slips on Weak German Data; Rate Cut Bets Mount

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The euro hit a two-week low against the dollar on Tuesday after weak German data fanned concerns about the euro zone economy and speculation the European Central Bank could cut interest rates.

A survey showed Germany's private sector shrank for the first time in five months in April, overshadowing improvements in French data.

The weak German data added to worries about the global economic outlook after earlier figures showed Chinese manufacturing growth slowed in April. This helped the yen higher and drove the commodity-linked Australian dollar to a six-week low against the U.S. dollar.

(Read More: Germany Drags Down Growth in Euro Zone)

The euro fell as low as $1.2973 and threatened to break decisively out of the $1.30 to $1.32 range that has held for the past couple of weeks. It was last down 0.4 percent on the day at $1.3009.

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The yen, which typically rises as investors seek safety during times of heightened concern about the global economy, recovered broadly, saw the U.S. dollar hit a low of 98.49 before bouncing back to last trade up 0.1 percent at 99.27 yen.

The dollar has faced stiff resistance at the 100 yen level, having stalled at a four-year high of 99.95 yen earlier this month, but most analysts and traders still believe it is on track to scale this peak.

(Read More: Here's What Could Push Dollar-Yen Past 100)

Strategists said the yen could take its cue from the next batch of Japanese capital flows data due on Thursday. A focal point for the yen is whether the BOJ's aggressive monetary easing will prompt Japanese investors to increase their purchases of higher-yielding overseas assets.

The following day, investors will look to the BOJ's policy meeting for clarity on how policymakers intend to implement the easing measures.

"Weak German PMI data is hurting the euro and intensifying expectations of a rate cut from the ECB," said Niels Christensen, currency strategist at Nordea in Copenhagen.

Comments on Monday from European Central Bank policymakers about falling inflation and poor growth prospects in the euro zone suggested the central bank may be leaning towards a cut in its main refinancing rate, which stands at a record low 0.75 percent.

(Read More: ECB Should Not Cut Rates: Top German Adviser)

More losses could push the euro towards chart support at its 200-day moving average around $1.2936 and the early April low of $1.2740.

But Christensen said it would take more bad news and falls in equity markets to drag the euro towards $1.28, especially as he expected the yen to weaken further following aggressive monetary easing by the Bank of Japan.

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Ken Dickson, investment director at Standard Life Investments, who have sold the euro against the dollar, said the single currency should be significantly lower.

"A rate between $1.10 and $1.20 is reasonable over the next three or four quarters. It is highly likely the ECB will ease rates," he said.

Yen Strengthens

The euro fell more than 1 percent to 127.87 yen, well below its April 11 three-year peak around 131.10 yen, but last was down 0.4 percent on the day at 129.15.

"It's probably just a matter of time, but there's no big catalyst until Thursday's data and BOJ meeting on Friday. We will go through 100 yen; it's just a question of when," said Geoff Kendrick, FX strategist at Nomura.

(Read more: Why the Aussie May Not Escape This Time)

The dip in the Chinese manufacturing data and falls in commodity prices pushed the Australian dollar down 0.4 percent to a 6-week low of $1.0221. It last traded down 0.2 percent at 1.0254. The Aussie also earlier lost around 1 percent against the yen and last traded down 0.2 percent at 101.79 yen.

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