* 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 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
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
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
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