The euro tumbled to a 2013 low against the US dollar today while the dollar rose to a six-month high against a basket of currencies as weak euro zone data highlighted a growing economic disparity with the United States.
Speculation that the European Central Bank may take action to curb economic deterioration gathered pace after benign euro zone inflation data, with the euro falling below the key psychological level of $1.30 for the first time since December.
Investors shunned the euro as European manufacturing appeared no closer to a recovery last month while growth in Asia cooled, according to business surveys and trade data that pointed to ongoing weakness in global demand.
Poor euro zone economic data, along with cooling inflation and the risk that political instability in Italy may push up borrowing costs for struggling countries, could exert pressure on the ECB to lower interest rates in coming months, which should keep the euro weak.
"The dollar index is flying high on improving growth differential prospects ... while at the same time investors remain concerned that fiscal uncertainty has the potential to weigh on the economy," said Andrew Wilkinson, chief economic strategist at Miller Tabak in New York.
The US government hurtled toward making deep spending cuts that threaten to hinder the nation's economic recovery, after Republicans and Democrats failed to agree on an alternative deficit-reduction plan.
US president Barack Obama meets top leaders of Congress at the White House this evening to explore ways to avoid the unprecedented, across-the-board cuts totalling $85 billion.
The International Monetary Fund warns that the cutbacks could knock at least 0.5 percentage point off US economic growth this year and slow the global economy.
The dollar index reached its highest level since late August. It gained as the euro fell to a 2013 trough of $1.2985, its lowest since December 11th. Option barriers were cited at $1.2950 and $1.2900.
"When you look across Europe, you see high unemployment, barely any growth, apart from Germany, and rising debt levels," said Howard Jones, advisor at money mangers RMG Wealth Management. "What Europe needs is growth, easier monetary conditions and a weaker currency."
"The US data in comparison is much better than Europe and to us, the dollar is a buy. We expect the euro to ease towards the mid-$1.20s in the next two months."
Interest rate spreads between two-year US government bonds over their German counterparts gave investors another reason to buy the dollar. Some expect the Federal Reserve to slow its asset purchase program later in the year as the US labour market shows signs of improvement.
In contrast, joblessness in the euro zone rose to an all-time high while business surveys showed manufacturing activity was sluggish in February.
