German data brings relief to euro, dollar stalls

US-dollars being counted at the Korea Exchange bank.
Chung Sung-Jun | Getty Images

The euro recovered from a 11-month low against the dollar, helped by better-than-expected German private sector growth data, although gains were likely to be temporary given expectations of more monetary stimulus.

The U.S. dollar, buoyed by rising Treasury yields and widening interest rate differentials in its favour, traded below 11-month peaks against a basket of major currencies, having scaled those highs after minutes of the Federal Reserve's July meeting, released on Wednesday, sounded slightly hawkish.

The extended its losses after a preliminary survey of China's manufacturing sector showed growth slowing to a three-month low.

In the euro zone, Germany's private sector grew for a 16th month running in August, suggesting Europe's largest economy could expand robustly in the third quarter after it surprisingly contracted in the second.

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Data from France showed business activity was stagnant in August, although service sector growth picked up.

While the composite euro zone survey showed activity slowing in August, it offered some relief to the single currency, as some had feared a far worse reading.

The euro rose 0.1 percent to $1.3278 after the German survey, having hit an 11-month low of $1.3242 in Asian trade.

The single currency has shed 1.2 percent in the past week as the dollar rebounded on better-than-expected data. Falling German Bund yields, lower money market rates, and a narrowing euro zone current account surplus helped push the euro lower.

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"The German data was better than expected, but it is clear that economic momentum is declining from a month earlier. While the euro can bounce a bit, the upside is rather limited from here," said Yujiro Goto, currency analyst at Nomura.

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"The euro should be on a gradual declining path."

The euro's bounce saw the dollar index slip to 82.20, having earlier hit 82.364, its highest since September. It broke out of the 81.188/81.716 range that held for much of this month.

The Fed minutes showed policymakers debated whether interest rates should be raised earlier given a surprisingly strong jobs market recovery. Most officials, however, wanted further evidence before changing their view.

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In any case, U.S. Treasury yields rose. hit a two-week high just shy of 0.5 percent.

That underpinned the dollar, which touched its highest in over four months at 103.965, not far from the April peak of 104.13. A break there could see the market aim for the 2014 high of 105.45 set in January.

"The momentum is there. The market is experiencing a bit of...euphoria, putting logic aside and now aiming for 104 . I hesitate to use the term but it's 'risk-on'," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

The soft China PMI survey put a further dent in the Australian dollar, which is sensitive to data from China, its main export market. The Aussie fell to $0.9235. It was last at $0.9260, down 0.2 percent on the day.