FOREX-Euro zone data knocks euro to 6-week low versus dollar
* Euro drops to 6-week low vs dollar after German PMI survey
* Support seen around Jan. 10 low
* Dollar index at three-month high after Fed minutes
By Anirban Nag
LONDON, Feb 21 (Reuters) - The euro fell to a six-week low against the dollar on Thursday hurt by fresh evidence of sluggish euro zone activity while expectations the Federal Reserve may stop providing monetary stimulus helped the greenback.
The euro has steadily lost ground since hitting a 15-month high on Feb. 1 against the dollar as worries about a recession in the euro zone and uncertainty from an Italian general election weighed on the currency.
On Thursday, "flash" PMI activity data for February pointed to continued weakness in the euro zone, keeping alive risks of an interest rate cut by the European Central Bank in coming months.
The euro dropped to $1.3197, its lowest since Jan. 10 from around $1.3260 after surveys showed German private sector activity grew at slower than expected pace. That came after French services sector contracted at the fastest pace in four years.
All of which kept the euro well below a 15-month peak of $1.3711 reached on Feb. 1. It has now broken below support at $1.3310, the 38.2 percent retracement of its November-February rally, and also its 55-day moving average at $1.3285, leaving it open for a test of its Jan. 10 low of around $1.3040.
While sovereign investors bought the euro when it dipped, traders said many were approaching this weekend's Italian elections in a cautious mood, wary of the prospect of a hung parliament. Such a scenario could trigger a selloff in the peripheral bond market which in turn would weigh on the euro.
"The French and the German PMI surveys have both knocked the euro lower," said Peter Kinsella, currency strategist at Commerzbank. "Combined with the Fed minutes that showed more dissension to further monetary stimulus in the U.S. and the grim economic reality in the euro zone, we could see a weaker euro."
The minutes from the January meeting of the Federal Open Market Committee, the U.S. central bank's policy-setting group, showed "a number of participants" expressed concern over the risks of continued asset purchases.
The hawkish impression the minutes left on market sentiment has so far seen investors put aside warnings from other Fed members about the dangers of ending the bond-buying programme prematurely.
DOLLAR INDEX HIGHER
As a result, investors and speculators bought the U.S. currency, driving the dollar index against major currencies to a three-month high of 81.377, after it posted its biggest one-day gain in seven months on Wednesday.
As the Fed considers the eventual end of its asset buying, the dollar stands to gain against currencies such as the yen as the Japanese central bank is playing "catch-up" and looking to expand its balance sheet aggressively, he added.
The dollar has gained 7.6 percent against the Japanese currency so far this year. The yen has been the worst performing major currency so far this year as investors bet on more aggressive policies from the Bank of Japan to reflate the world's third-biggest economy.
On Thursday, the dollar took a breather from its recent rally and was trading down 0.2 percent at 93.36 yen
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