The euro fell to a six-week low against a buoyant dollar on Wednesday, hurt by an unexpectedly large contraction of the euro zone economy which bolstered the case for more monetary easing by the European Central Bank.
In contrast, the U.S. is showing signs of a recovery, underpinning expectations that the Federal Reserve may wind down its asset purchases program by the end of the year. That has pushed up U.S. bond yields and driven the dollar to a 4 1/2-year high against the yen.
The euro was last down 0.3 percent against the dollar under $1.2881, with exporter bids cited around $1.2880. Many investors are looking for the single currency to bounce towards $1.2900 before initiating fresh bets against it, expecting it to then fall towards $1.2740, traders said.
"This (data) will put pressure on the ECB to act. And if U.S. yields stay supported and data there keeps improving, we could see the euro target the $1.2740 area," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
European Central Bank officials have said they could ease monetary policy further, and perhaps even take the deposit rate, the level at which banks park their surplus cash with the central bank, below zero, if the economy slowed.
A cut in the deposit rate would make holding euros unattractive and could lead to a broad selloff.
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Germany, the biggest economy in the currency bloc, grew by just 0.1 percent in the first quarter, weaker than forecast, while the second-largest economy, France entered a shallow recession after contracting by 0.2 percent in the same period. Overall, the euro zone contracted by 0.2 percent, compared with a 0.1 percent fall forecast.
The euro's losses saw the dollar index last trade up 0.2 percent to 83.79. More gains by the dollar could see the index rise to as high as 84.10, a peak hit in July 2012. Beyond that, the index would rise to levels not seen since mid-2010.
The dollar rose as high as 102.76 yen, its highest since October 2008, before slipping to last trade slightly down on the day to 102.31 yen. Option barriers are cited at 103 yen that could slow the dollar's rise, traders said. But the overall trend for more yen weakness remained.
The Bank of Japan could ease its already ultra-loose monetary policy even further as early as October if prices do not rise as quickly as projected, according to economists polled by Reuters.
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The dollar rose to a nine-month high against the Swiss franc of 0.97165 francs and a 11-month peak against the Australian dollar. Traders said the U.S. currency could rise further if the New York Fed's "Empire State" general business conditions beat expectations.
"We are bullish about the dollar," said Howard Jones, advisor at RMG Wealth Management.
"The overriding factor to us is that there is potential for quantitative easing in the U.S. to taper and that should help the dollar. We are especially bullish dollar against the Swiss franc and the Australian dollar where we think there will be more returns."