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Euro nears 3 1/2-month low on weaker economic data

London

THE euro fell on Tuesday, heading towards a 3 1/2-month low as weaker-than-expected economic data at the start of the week dented eurozone sentiment ahead of the US Federal Reserve's policy decision.

The dollar has rallied in the last fortnight, helped by the 10-year Treasury yield topping 3 per cent and a reconnection between higher interest rates and a buoyant currency.

While markets don't expect a change in interest rates from the US Federal Reserve at the conclusion of a meeting on Wednesday, analysts will be watching for any change in language.

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BNY Mellon strategists said in a note that if the Fed drops any cautionary comments on its inflationary outlook, then it would signal a growing confidence among policymakers that inflation has firmed up enough for an increase in forecasts.

Bond markets are expecting roughly three rate hikes until the end of the year.

That, combined with growing doubts about when the European Central Bank will move to slow its stimulus as the economy shows signs of peaking, have knocked the single currency lower.

The euro fell 0.2 per cent to US$1.2058, not far from the $1.2055 it hit at the end of last week, the weakest level since mid-January.

The dollar rose 0.1 per cent against a basket of currencies to 91.964.

Markets are also focused on Friday's April US non-farm payrolls report, which could provide further signs of strength in the world's biggest economy.

The greenback had risen 2 per cent in April, its biggest monthly gain since November 2016, after the U.S. 10-year Treasury yield climbed above the psychologically significant 3 per cent threshold to four-year highs last week.

The US currency received its latest lift after the euro slumped on soft German March retail sales data.

"The euro's downturn is expected to continue in the near term amid receding prospects of the ECB embarking on monetary tightening," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

"With such themes weighing on its peers, the dollar looks well supported against the euro and pound, even without help from higher Treasury yields." European markets are closed on Tuesday for a public holiday.

The dollar was a shade higher at 109.43 yen.

The greenback climbed to a 21/2-month high of 109.540 yen on Friday as long-term US yields rose. But it has lost momentum as Treasury yields have pulled back from four-year peaks. REUTERS