* Euro drops after euro zone PMI surveys
* Prospect of hung Italian parliament weighs on euro
* Dollar index hit 5-month high
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 21 The euro dropped to a six-week
low against the dollar and a three-week trough against the yen
on Thursday in the wake of data showing a struggling euro zone
economy and amid uncertainty ahead of Italy's election at the
Expectations that the U.S. Federal Reserve may start
reducing monetary stimulus earlier than thought also helped the
dollar gain broadly.
The euro zone purchasing managers' data for February pointed
to continued weakness in the region, keeping alive chances of an
interest rate cut by the European Central Bank in coming months.
"The PMI news is not good and shows the euro zone is under
economic duress and you add to the current uncertainty ahead of
the Italian elections and we have a euro that is struggling to
get ahead," said Matthew Lifson, senior trader and analyst at
Cambridge Mercantile Group in Princeton, New Jersey.
Prospects of a fragmented parliament after Italy's national
election could trigger a sell-off in the peripheral bond market
and weigh on the euro.
The euro dropped to $1.3166, its lowest since Jan.
10, and well below a 15-month peak of $1.3711 reached on Feb. 1.
The euro last traded at $1.3209, down 0.5 percent.
It has now broken below support at $1.3310, the 38.2 percent
retracement of its November-February rally, and its 55-day
moving average at $1.3285. The losses leave it open for a test
of the Jan. 10 low of around $1.3040.
Against the yen, the euro fell to 122.23 yen, its weakest
level since late January. It was last at 122.91, down 1.1
David Mackie, European economist at JP Morgan in London,
said although the euro zone is making progress, the past month
has seen a broad-based disappointment on the macroeconomic
"An exit from recession is still likely, but the journey
looks to be slower and bumpier than we were expecting and the
improvement in economic activity looks to be disproportionately
skewed towards Germany," Mackie said.
He added that the recent round of weak data would be enough
reason for the ECB to cut rates.
The single currency was already under pressure against the
dollar after minutes from the Federal Reserve's January
policy-setting meeting released Wednesday showed "a number of
participants" had expressed concern over the risks of continued
"Those Fed minutes really hit long euro positions in most
crosses," Cambridge's Lifson said.
Despite the euro's broad weakness, BNP Paribas said the
reaction to the Fed minutes was overdone and recommended buying
the single currency against the dollar, with a target of $1.38.
DOLLAR INDEX GAINS
The Fed minutes fueled speculation among market players that
the Fed is moving closer to tightening policy, helping push the
dollar index to a five-month high of 81.508.
The index had posted its biggest one-day gain in seven
months on Wednesday and last quoted at 81.354, up 0.4 percent.
Broad demand for the dollar helped push the U.S. currency to
a one-month high against the Swiss franc of 0.9330 franc,
and a four-month peak against the Australian dollar at
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 Bank of England
are considering printing more money and expanding their balance
sheets, driving down the value of their currencies.
The dollar has gained more than 7 percent against the yen
while sterling has lost 6 percent so far this year.
The yen has been the worst performing major currency so far
in 2013 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 0.4 percent at 93.22 yen.
U.S. data showing initial jobless claims rose more than
expected in the latest week added to the dollar's losses against
the Japanese currency, as did an unexpectedly weak survey of
business activity in the U.S. mid-Atlantic region.
Morgan Stanley strategists said the dollar's decline was
likely to be limited 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.