NEW YORK The euro fell against the dollar on Monday in thin trading after a bigger-than-expected drop in German business sentiment even as it raised hopes in some that the euro zone's largest economy will do more to revive the bloc's growth.
Sentiment toward the euro remained uncertain as markets awaited a series of key events next month, including the European Central Bank's policy meeting on September 6, followed by the German Constitutional Court's ruling on the euro zone's permanent bailout fund on September 12.
A speech by Federal Reserve Chairman Ben Bernanke due on Friday will also be keenly watched by market players for any signs of action by the U.S. central bank to spur tepid growth.
German business sentiment dropped for a fourth straight month in August to reach its lowest since March 2010, the Munich-based Ifo think tank said, with the business climate hit by increasing worries about the future level of exports.
"The news clearly shows that Germany cannot escape unharmed if the rest of the euro zone falls into a deep recession," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York.
"Therefore policymakers may now temper their insistence on austerity and instead will pursue more stimulative policies in order to revive growth."
The euro hit a session high of $1.2535 on Reuters data after the Ifo survey was released, but gradually lost ground to trade at $1.2499, closer to the session low of $1.2488, and down 0.1 percent on the day.
It stayed well below a peak of $1.2589 set last Thursday, its highest since July 4. Traders cited strong offers above $1.2580 and option barriers at $1.2600. Support lies around $1.2500.
Volume was thin with London shut for a holiday.
Further gains in the euro are likely before U.S. Federal Reserve Chairman Ben Bernanke speaks at a central bankers' gathering in Jackson Hole, Wyoming, on Friday amid expectations of another round of monetary easing from the U.S. central bank to stimulate sluggish growth.
Chicago Federal Reserve President Charles Evans said the Fed should immediately launch a fresh round of monetary stimulus and buy bonds for as long as it takes to produce a steady decline in the jobless rate.
The euro climbed 1.4 percent last week on optimism the ECB will soon start buying Spanish and Italian bonds to bring down borrowing costs in troubled euro zone economies.
Investors had been waiting for a speech by German ECB Executive Board member Joerg Asmussen who said last week a Greek exit from the euro zone was manageable but not preferable. But his comments on Monday did little to move investors one way or another, analysts said.
In remarks aimed at assuaging the angst of Germany's Bundesbank, Asmussen said the European Central Bank will tailor its new bond-buying plan to dispel any concerns that it funds governments.
He did not say when the bank would begin buying but made clear the plan would go ahead despite Bundesbank opposition.
Underscoring challenges to a quick solution to the debt crisis, Germany's Bundesbank has likened the ECB's bond-buying plan to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year.
"There's a lot of event risk, and I think this event risk will keep the euro capped," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong. He predicted the euro "will struggle to get above $1.26 this week".
Against the yen, the euro was little changed at 98.44 yen. The dollar was up 0.1 percent at 78.74 yen.
The Australian dollar skidded to a one-month low and looked vulnerable to further losses on fresh concerns about China's economy. The Aussie is often used to express views on the world's second-largest economy.
The Aussie dollar was last down 0.3 percent at $1.0373.
(Reporting by Nick Olivari and Wanfeng Zhou; Editing by James Dalgleish)