Euro falls to 2-month low against US dollar

London

THE euro fell to a two-month low against the US dollar on Wednesday, hit by weak economic data and speculation that the European Central Bank may open the door to aggressive monetary policy easing as soon as this week.

Money markets are pricing in a 54 per cent chance of a 10 basis point cut on Thursday's ECB meeting.

The probability rose after the eurozone purchasing managers' index unexpectedly fell to a three-month low of 51.5 in July from 52.2 in June. Economists polled by Reuters had expected a slight decline to 52.1.

The 50 mark separates economic growth from contraction.

The ECB could also signal further reductions down the road or a fresh round of quantitative easing (QE), investors said.

"Disappointing PMIs out of the euro area will only increase expectations further for (Mario) Draghi to deliver a dovish sounding message tomorrow," said Mohammed Kazmi, a portfolio manager at UBP.

"He will be expected to strongly hint at both rate cuts and QE ahead of easing that is anticipated for September."

The common currency was down 0.1 per cent at US$1.1137 after earlier hitting US$1.1127, its lowest since May 30. The euro hit a two-year low of US$1.1105 in May.

Markets betting on ECB easing have lifted the Swiss franc , which traded at 1.0980 francs per euro, not far from the two-year high of 1.0972 reached on Tuesday.

The surging franc is heaping pressure on Swiss officials to act to protect their export-heavy economy.

The euro has shed 2 per cent of its value this month as investors priced in the probability of eurozone borrowing costs falling deeper into negative territory. A broadly stronger US dollar also contributed to the single currency's woes.

Expectations of lower interest rates in developed economies weighed on other currencies, such as the Australian dollar, which fell 0.5 per cent to a two-week low of US$0.6973.

Three consecutive days of lower iron ore prices may also be hurting currencies sensitive to commodity prices like the Aussie, analysts said.

The US dollar firmed after Washington reached a deal to lift government borrowing limits, which analysts said could limit the US Federal Reserve's appetite for rate cuts.

The US dollar was flat against a basket of currencies at 97.704 , having edged up to a five-week high of 97.76 earlier following gains of nearly 0.5 per cent the previous day.

The pound rose slightly from recent lows after Boris Johnson on Tuesday won the contest to be Britain's next prime minister, focusing investor attention on the prospect of a no-deal Brexit. REUTERS