FOREX-Sluggish economy knocks euro to 6-wk low vs 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 against the dollar on Feb. 1 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 chances of an interest rate cut by the European Central Bank in coming months and clouding the euro's outlook.
The euro dropped to $1.31765, 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 from the Middle East and Asia bought the euro when it dipped and a good response to a Spanish bond auction helped it off its lows, 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 sell-off 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 dollar. The dollar index which measures the U.S. currency's performance against a basket of currencies, rose to a three-month high of 81.465. The index had 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 like the yen and the British pound.
Both the Bank of Japan and the Bank of England are considering printing more money and expanding their balance sheets aggressively driving down the value of their currencies.
The dollar has gained 7.6 percent against the yen while sterling lost 6 percent so far this year.
The yen has been the worst performing major currency so far among the most actively traded pairs 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 0.3 percent at 93.25 yen.
Morgan Stanley strategists said the dollar's decline is likely to be limited at around the 92.90 yen area, the low struck on Feb. 12, and the greenback would eventually rise to test its recent near three-year highs of around 94.50 yen.
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