The euro slid to its lowest against the dollar in six weeks on Wednesday as data showing an unexpectedly large contraction of the euro zone economy bolstered the argument for more monetary easing by the European Central Bank.
The euro fell for a fifth straight session against the greenback after data showed Germany's economy crept back into growth at the start of the year but not by enough to stop the overall euro zone economy from contracting for a sixth straight quarter, while France slid into recession.
In contrast, the United States is showing signs of a recovery, underpinning expectations that the Federal Reserve may wind down its asset-purchasing program by the end of the year.
The dollar briefly pared gains after data showed manufacturing activity in New York state unexpectedly contracted in May as new orders and shipments of finished goods fell.
Inflation data showed U.S. producer prices recording their largest drop in three years in April, pointing to weak inflation pressures that should give the Federal Reserve latitude to keep monetary policy very accommodative.
"There was some profit taking in the dollar after the data, with the manufacturing report the biggest surprise," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.
"Nevertheless, the U.S. economy appears to be improving, albeit slowly, while the euro zone GDP data overnight reinforced expectations of additional easing from the ECB, either through lower interest rates or through nonstandard measures such as negative deposit rates," he said.
"That contrasts with a growing notion that the Fed is inching closer to an exit strategy," he said.
The euro fell as low as $1.2842, its lowest since April 4, and last traded down 0.5 percent against the dollar at $1.2854 . Against the yen, the euro last traded at 131.74 yen , down 0.4 percent on the day.
European Central Bank officials have said they could ease monetary policy further, and perhaps even take the deposit rate, the level at which banks park their surplus cash with the central bank, below zero if the economy slowed.
A cut in the deposit rate would make holding euros unattractive and could lead to a broad selloff.
_0">Germany's economy, the biggest in the currency bloc, grew by just 0.1 percent in the first quarter, weaker than forecast, while France's, the second-largest, entered a shallow recession after contracting by 0.2 percent in the same period. Overall, the euro zone economy contracted by 0.2 percent, compared with a 0.1 percent forecast fall.
Italy, meanwhile, is set to achieve its goal of extending the average maturity of its debt on Wednesday by issuing a new six-billion-euro 30-year bond, its first since 2009.
Concerns about the euro zone's recession trumped positive news out of Greece, with 10-year Greek government bond yields tumbling to their lowest in nearly three years, one day after Fitch upgraded the country's sovereign credit ratings.
DOLLAR RISES VERSUS YEN
The dollar earlier in the global session rose as high as 102.76 yen on Reuters trading platform, its highest since October 2008, but dollar gains were pared during the North American session on falling U.S. Treasury bond yields. Yields move inversely to price.
_6">The dollar last traded at 102.48 yen, up 0.1 percent on the day, according to Reuters data.
_7">Foreign investors sold long-dated U.S. securities in March, as Treasuries showed modest inflows after strong buying in previous months, data from the U.S. Treasury showed on Wednesday.
_8">China, the largest foreign creditor, reduced its Treasury holdings to $1.2505 trillion, while Japan trimmed its to $1.1050 trillion.
_9">Japan's central bank in April started an aggressive stimulus program that will inject some $1.4 trillion into the Japanese economy in less than two years. Analysts expect that to keep the yen weak and push down Japanese bond yields, spurring more Japanese purchases of U.S. assets.
_10">"Taking recent U.S. and Japan data together, it is clear that long-term portfolio flows have become less important in driving recent currency moves, and hedging of the outstanding stock of assets is almost certainly a more important driver," said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank in New York.
_11">"To the extent that expectations of a longer-term dollar turn are gaining traction, these expectations tend to be a self-fulfilling positive dollar factor," he said.
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