FOREX-Euro heads towards one-month low as sentiment sours

The euro fell towards a one-month low on Wednesday as the contrast between solid economic data in the United States and souring confidence measures in the euro zone kept the dollar supported near 22-month highs.

Australia's dollar was the biggest mover among the major currencies, dropping one per cent after weaker-than-expected inflation numbers heightened the prospect of an interest rate cut. Deteriorating German business morale, after a business climate index for April came in below forecasts, was the latest signal that economic performance in the eurozone is relatively weak.

The greenback, by contrast, was propelled higher by strong U.S. housing data on Tuesday - the latest signal the American economy is outperforming rivals, encouraging investors to snap up the dollar in recent weeks. "We see the USD as about 10 per cent overvalued on long-term PPP (purchasing power parity) bases," Neil Dwane, Global Strategist at Allianz Global Investors, told the Reuters Global Market Forum.

"But with the UK, Japan near recession, China keeping the yuan stable and the euro facing a political summer it feels like the USD is by default going to remain OK," he said, adding that was especially the case if the Federal Reserve had to tighten interest rates later in the year.

The dollar index, which measures the U.S. currency versus a basket of six major rivals, stood at 97.622 after rising to 97.777 overnight, its highest since June 2017. The euro weakened 0.2 per cent to $1.1211 but held above its early April low of $1.1183. The weakness in the euro allowed the Swiss franc to strengthen from six-month lows marked on Tuesday.

The franc has been hit hard as investors dumped safe-haven currencies during this year's rally in risk assets. It had recovered 0.3 per cent to $1.1416 francs by 1045 GMT. The Aussie fell to a 1-1/2 month low of $0.7027.

Marshall Gittler, the currency strategist at ACLS Global, said market expectations for an Australian interest rate cut in May had grown. He also noted data indicating currency managers were long the Aussie. "That means there are plenty of sellers of AUD left in the market," he said.

The Canadian dollar shed 0.3 per cent to C$1.3461 and a six-week low despite the recent rise in oil prices as investors bet the Bank of Canada would stick to its dovish policy stance when it meets later on Wednesday. Sterling extended recent losses to hit another two-month low of $1.2915, as pressure grows on British Prime Minister Theresa May to come up with a Brexit plan amid stalled negotiations with the opposition Labour party.

The yen was unchanged at 111.86 against the dollar.