German business sentiment drop hits euro; dollar broadly stronger

NEW YORK (Reuters) - The euro slumped to a 22-month low against the U.S. dollar on Wednesday after a surprise drop in a leading indicator for economic activity in Germany highlighted the divergence between economic data in the United States and the euro zone.

FILE PHOTO: U.S. dollar notes are seen in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration

German business morale deteriorated in April, bucking expectations for a small improvement, as trade tensions hurt the industrial engine of Europe’s largest economy.

The euro fell 0.68% to $1.1149, its lowest since June 2017. The common currency was on pace for its worst one-day fall in about seven weeks.

“The broader importance of the German data is that market participants had been hoping that the rebound in Chinese monetary conditions, in lending in China, would help to boost demand for German exports and would lift spirits in the euro zone’s core economies,” said Karl Schamotta, director of foreign exchange strategy and structured products at Cambridge Global Payments.

“We are seeing successive prints that show that Germans are not necessarily turning more positive here,” said Schamotta.

The greenback has fared well in recent weeks supported by upbeat data.

“The dollar is winning the reverse beauty contest,” said Schamotta.

“It’s not necessarily that fundamentals of the U.S. are improving dramatically or anything like that, but in relative terms U.S. markets are looking like attractive places to park capital,” he said.

The dollar index, which measures the U.S. currency versus a basket of six major rivals, was up 0.49% at 98.119, its highest since June 2017.

Investors will watch the release on Friday of U.S. gross domestic product data for the first three months of 2019, for signs of whether the United States remains stronger than other leading economies.

The dollar was 0.38% higher against the Japanese yen, ahead of the conclusion on Thursday of a two-day rate review meeting where the Japanese central bank is widely expected to keep monetary policy steady.

On Wednesday, the Australian dollar fell 1.25% after weaker-than-expected Australian inflation numbers heightened the prospect of an interest rate cut.

Latin American currencies broadly softened against a robust dollar, with the Argentina’s peso slid to its lowest level in more than two weeks.

The pound held at a two-month low weighed down by the strong dollar and fading hopes of a breakthrough in Brexit talks between the British government and the opposition.

The Canadian dollar weakened against its U.S. counterpart to its lowest in nearly four months, as investors raised bets on a Bank of Canada interest rate cut this year after the central bank slashed its economic growth outlook.

Reporting by Saqib Iqbal Ahmed; Editing by Lisa Shumaker