NEW YORK (Reuters) - The euro climbed to a one-week high against the dollar on Tuesday after first-quarter economic growth figures in the euro zone beat market expectations, dispelling some pessimism over the economic bloc’s common currency.
Mixed U.S. data and caution ahead of a two-day Federal Reserve meeting pushed the dollar further away from a near two-year high.
Euro zone economic growth accelerated to 0.4% in the first three months of 2019, recovering from a slump in the second half of last year, data showed on Tuesday.
The stronger-than-forecast data offset a disappointing manufacturing PMI survey this month and cautious comments from European Central Bank policy-makers which raised concerns that the broader economy is struggling to gain traction.
“The (overall) data have been coming in better than expected. The euro is the biggest short in the market right now,” said Steven Englander, global head of G10 FX research at Standard Chartered Bank in New York.
Higher-than-expected growth figures could squeeze some hedge funds who have been amassing large short positions in the euro, worth a net $14.8 billion in the week to April 23.
In late U.S. trading, the euro was 0.3% higher at $1.1219 after the euro zone growth data. The currency ended up 0.01% in April, shaving its year-to-date loss against the greenback to 2.17%.
An index that tracks the dollar against the euro, yen, sterling and three other currencies was down 0.38% at 97.489, paring its monthly gain to 0.2%. It hit a 23-month high at 98.330 last Friday.
“We feel the dollar-buying move was a bit overdone,” Englander said.
Earlier Tuesday, data showed U.S. labour costs grew 0.7% in the first quarter, reinforcing the notion that wage pressure would stay tame even although hiring has remained strong, the Labour Department said.
Moreover, U.S. Midwest factory activity unexpectedly fell in April to its weakest since January 2017, according to an index from MNI and the Institute for Supply Management-Chicago.
Analysts expect no policy changes coming out of the Fed’s two-day policy meeting, which ends on Wednesday, but investors want to hear how Fed Chairman Jerome Powell resolves the divergence between solid economic growth and slowing inflation.
Trading volume was muted by Japanese markets being closed for the Golden Week holiday. Activity will likely drop off further on Wednesday when China and much of Europe will be off for the May Day holiday.
The Japanese yen rallied to a three-week high after China’s official Purchasing Managers’ Index dipped to 50.1 April.
It was up 0.26% at 111.355 yen per dollar, reducing its month-to-date loss to 0.483%.
Additional reporting by Saikat Chatterjee in LONDON and Wayne Cole in SYDNEY; editing by Alison Williams, James Dalgleish and Sonya Hepinstall