Euro slumps on weak data, IMF growth forecast cuts

London

THE euro struggled near a three-week low on Tuesday as weak data and a cut in European growth forecast by the International Monetary Fund (IMF) prompted investors to turn bearish on the single currency.

Morale among German investors improved slightly in January, but their assessment of the economy's current condition deteriorated to a four-year low, a survey showed on Tuesday, sending mixed signals for the growth outlook of Europe's largest economy.

That data comes on the heels of an overnight reduction in Europe's growth forecasts by the IMF, which trimmed its growth projections in the euro zone to 1.6 per cent in 2019 from 1.8 per cent in 2018, 0.3 percentage point lower than what was projected three months ago.

"The outlook for the euro has become a bit more cautious and that is reflected in the positioning data," said Kamal Sharma, director of G10 FX strategy at Bank of America Merrill Lynch.

The single currency was down 0.1 per cent at US$1.1347, its lowest since Jan 4. It has weakened nearly 2 per cent against the dollar over the last two weeks.

While investors turned bearish on the dollar at the end of 2018 citing weakening US growth on the back of a fading fiscal stimulus, markets have been ill prepared about how much the slowdown in the United States and China would impact other growth engines such as Europe.

Latest flows data from Bank of America Merrill Lynch shows real money investors have been selling euros for the last five weeks while hedge funds have also turned bearish recently.

Still, some market watchers say the dollar may also come under pressure as the US government shutdown begins to weigh on domestic growth.

Morgan Stanley strategists believe that US growth in the first quarter is likely to fall below their forecast of an annual 2.2 per cent, about half the 4.2 per cent growth in 2018.

On Monday, the dollar rose to 96.472, its highest level since Jan 4 and up more than 1.5 per cent from a three-month low earlier this month.

The dollar strengthened 0.3 per cent versus the offshore yuan to 6.8157. It has gained around 1 per cent over the offshore yuan in the past seven sessions.

The yen, another safe-haven currency, was steady against the dollar, fetching 109.64 in early trade. The Bank of Japan is expected to leave policy unchanged at its Jan 22-23 meeting. Analysts expect monetary policy to remain accommodative in Japan this year. REUTERS