Euro stuck near two-month low as markets brace for dovish ECB

By Stanley White

TOKYO (Reuters) - The euro was mired near a two-month low on Thursday ahead of a European Central Bank meeting that could signal monetary easing as growth in the currency zone falters.

Sentiment toward the single currency took a blow after data showed Germany's manufacturing sector contracted at the fastest pace in seven years while French business growth unexpectedly slowed, sending European bond yields lower.

In Asia, emerging currencies edged lower after North Korea fired two short-range missiles into the sea early on Thursday, diminishing appetite for riskier assets in the region.

However, investor focus in Asia remains predominantly on global central bank and political developments, particularly in Europe and the United States.

Sterling held onto gains it made since Boris Johnson took office as Britain's new prime minister on Wednesday, but investors are still wary of a no-deal Brexit in which Britain would leave the European Union without a trade agreement.

The dollar found support after U.S. Treasury Secretary Steven Mnuchin said he would not advocate for a weaker currency.

Investor focus shifts to the ECB's meeting later on Thursday and a widely expected interest rate cut from the U.S. Federal Reserve next week, which are both expected to dictate the tempo for currencies and bond yields in coming months.

"I see more downside for the euro, because there are no good signs coming from Europe at the moment," said Tsutomu Soma, general manager of fixed income business solutions at SBI Securities in Tokyo.

"Don't expect European bond yields to rise anytime soon. The U.S. is headed toward lower rates, which used to be a supportive factor for the euro, but that is no longer the case."

The common currency (EUR=EBS) traded at $1.11415 after touching $1.11270, its lowest since May 31.

The euro has fallen 2.0% so far this month on increased speculation the ECB would join other central banks in easing policy as a trade war between the United States and China weakens the global economy.

Traders see a 48% probability that European policymakers will lower a key deposit rate by 10 basis points to minus 0.50%, according to interest rate swaps.

If the ECB keeps policy on hold Thursday, economists say President Mario Draghi could flag a rate cut for the next policy meeting in September.

The Ifo institute will release its closely-watched index of German business sentiment later on Thursday, which will provide further clues about the health of Europe's largest economy.

Sterling was a shade higher at $1.2484, staging a modest recovery from a 27-month low of $1.2382 reached last week.

Johnson promised in his first speech as prime minister to lead Britain out of the EU on Oct. 31 with "no ifs or buts" and warned there would be a no-deal Brexit if the bloc refused to negotiate.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

The dollar traded at 108.200 yen , near a one-week high of 108.290 yen.

Mnuchin told CNBC in an interview the United States benefits from the greenback's standing as the world's reserve currency.

The dollar was also supported by a White House statement that top U.S. negotiators will meet their Chinese counterparts in Shanghai starting July 30.

The world's two-biggest economies are seeking a resolution to their bruising trade war.

The dollar index (DXY), which measures the greenback against six major currencies, stood at 97.701 after touching an eight-week high of 97.810 on Wednesday.