Euro zone GDP data returns better than expected, lifting the euro, as the dollar weakens after interest rate cuts by the Federal reserve.

Euro rises as US dollar weakens due to interest rates cuts. File photo taken on October 31, 2019.
Euro rises as US dollar weakens due to interest rates cuts. File photo taken on October 31, 2019. (Reuters)

The euro rose against the dollar on Thursday after better-than-expected eurozone GDP data, while the US currency fell after Federal Reserve appeared to leave open the question of whether it would cut interest rates further.

The Fed lowered its benchmark rate by 25 basis points to a target range of 1.50 percent to 1.75 percent.

It dropped a reference in its policy statement that it would "act as appropriate" to sustain economic expansion – language considered a sign of future cuts.

However, the lack of an explicit signal the Fed was done with easing for now was taken as less hawkish than expected, helping to drive the dollar down against most currencies, particularly the Chinese offshore yuan, which rose to an 11-week high.

The euro was last up 0.1 percent at $1.1161, after earlier reaching a 10-day high of $1.11755.

Euro zone economic growth in the third quarter defied market expectations of a slowdown and was steady quarter-on-quarter, preliminary data showed on Thursday, while headline inflation slowed because of a sharp fall in energy prices.

"A brighter outlook globally relative to the US is not a backdrop we have had for some time and that is limiting the appetite for dollar buying," said MUFG analysts in a note to clients. They were also referring to investors holding on to hopes that a US-China trade deal was still possible and that Britain will exit the European Union with a divorce deal in place.

"We see solid support in EUR/USD being maintained as long as this relative change in global growth expectations can be maintained," they said.

European Central Bank member Ignazio Visco said the ECB's monetary policy will remain expansionary to sustain demand. His comments helped limit the euro's rise.

The dollar index rose on Wednesday to its highest since Oct. 17 after the Fed removed its reference to "act as appropriate". But it slipped 0.4 percent on Thursday to 97.29, its lowest in a week as investors became less convinced that more rate cuts were off the table.

The index was on course for its biggest monthly fall since January 2018.

The dollar also fell against the safe-haven Japanese yen, by 0.6 percent to 108.16 yen, a more than two-week low.

The yen rose after Chile withdrew as host of an APEC summit in November, where the US and China had been expected to take major steps toward ending a 15-month-old trade war.

The yen rose further after China raised doubts about the possibility of a long-term trade deal agreement with the US.

But analysts and traders still think the world's two biggest economies will arrive at a trade truce. China's Foreign Ministry said on Thursday Chinese and US heads of state have been maintaining contact.

The Chinese yuan rallied to its highest in 11 weeks against the dollar. The offshore yuan last traded hands flat at 7.0477 per dollar.

"Because of this sort of lull in the US-China trade war, you're starting to see investors getting their toes wet in EM assets," said Stephen Gallo, European head of FX strategy at BMO Capital Markets. "People are hopeful of a year-end Santa Claus rally ... they're hopeful we can get a trade deal."

The Chinese currency was tracking resurgent risk appetite in emerging markets, instead of leading it, Gallo said.

"I really can't think of a bullish China story for now."

Source: Reuters