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German slowdown hits euro, investors watch sterling

London

THE euro fell on Tuesday after data showed Germany's economy slowed in 2018, underscoring fears about a broader slump in Europe.

Europe's largest economy is struggling with a cooling of the global economy and trade disputes driven by US President Donald Trump's policies.

An unexpected fall in German industrial output last week weakened the euro and bred concern about a slowdown and the European Central Bank's caution as it tries to wean the region off stimulus.

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The German economy grew by 1.5 per cent in 2018, the weakest rate in five years. Soon after the GDP data was released, the euro dropped to a five-day low of US$1.1423.

Analysts said that while the figures were in line with expectations, the gloomy picture added to growing doubts about whether the ECB will raise interest rates at all in 2019.

"There are increasing concerns about euro zone economic dynamics, this confirmed those fears and we now expect more caution from the ECB," said Esther Maria Reichelt, an FX analyst with Commerzbank.

"In the short-run the biggest risk to Europe and the euro is a disorderly Brexit, which would come at the most inconvenient time for the German economy," she added.

Investors are closely watching sterling with British Prime Minister Theresa May widely expected to lose a vote in parliament later on Tuesday on her Brexit deal.

"Speculators have been betting a failed vote could lead to a possible delay to Brexit from March 29 to July to allow for fresh elections or a second referendum," Philip Wee, currency strategist at DBS, said in a note.

Other analysts expect the pound will take a major beating if Mrs May loses the vote by a wide margin since it could push Britain closer to a chaotic exit from the European Union. Sterling traded down 0.2 per cent against the dollar at US$1.2848 ahead of the vote but remained close to a two-month high hit on Monday of US$1.2930.

The dollar edged up on Tuesday after days of losses caused by concern about a global slowdown and expectations of a pause in Federal Reserve rate hikes this year.

A shock contraction in Chinese trade and worries over the US economy losing stream have bred fears of a sharp global downturn that would probably see the Fed refrain from tightening monetary policy this year.

That has seen the dollar weaken against its peers by more than 1 per cent since the start of the year. The dollar index on Tuesday strengthened by 0.2 per cent to 95.84. REUTERS