The euro extended gains to top 1.12 dollar on Tuesday after first quarter growth numbers for the euro zone were stronger than expectations, dispersing some of the negativity surrounding the outlook for the single currency.
Euro zone economic growth was stronger than expected in the first quarter, rebounding strongly from a slump in the second half of 2018, while unemployment fell to its lowest rate in more than a decade, data showed on Tuesday.
The strong data offered some relief to traders after a disappointing manufacturing PMI survey this month and cautious comments from European Central Bank policymakers raised concerns that the broader economy is struggling to gain traction.
“The data offers some relief to traders though it is still too early to say if the risks over the economy has completely lifted,” said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.
The single currency inched a quarter of a per cent higher to 1.1215 dollar after the data. On a year-to-date basis, it still remains one of the weakest currencies, falling more than 2 per cent.
Trading was broadly quiet with Japan on holiday with volumes set to get thinner on Wednesday when China and much of Europe will be off.
Higher than expected growth figures could squeeze some hedge funds who have been amassing large short positions in the euro, worth a net 14.8 billion dollars in the week to April 23.
Elsewhere, the Japanese yen rallied to a three-week high underlining the broad caution in the currency markets after China’s official Purchasing Managers’ Index dipped to 50.1 April.
Forecasts had been for no change from March’s 50.5 or an increase.
Some of the favoured currencies in a low-volatility environment such as the Australian dollar and the Aussie/Swiss franc fell 0.2 to 0.3 per cent.
Trading was thin with Japan on holiday, and set to get thinner on Wednesday when China and much of Europe will be off.
Against a basket of currencies, the dollar was flat at 97.839. On a monthly basis, it was up 0.6 per cent and on track for a third consecutive month of gains.
The Federal Reserve’s two-day policy meeting, which ends on Wednesday, remains a hurdle for the dollar. No change in policy is expected, but the market wants to hear how Chairman Jerome Powell resolves the divergence between solid economic growth and slowing inflation.