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 strong data offered some relief to traders after a disappointing manufacturing PMI survey this month and cautious comments from European Central Bank policymakers 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.
At 3:10 p.m., the euro was 0.30% higher at $1.1219 after the euro zone growth data. The currency was on track to fall 0.13% in April, bringing its year-to-date loss against the greenback to 2.32%.
An index that tracks the dollar against the euro, yen, sterling and three other currencies was down 0.38% at 97.49. 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. labor costs grew 0.7% in the first quarter, reinforcing the notion that wage pressure would stay tame even although hiring has remained strong, the Labor 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 0.27% at 111.33 yen per dollar.