The euro hit a two-week low against the dollar yesterday after a slew of soft eurozone data underscored the increasingly gloomy economic outlook and cooled expectations of higher interest rates.
Munich-based Ifo economic research institute said its index of German corporate sentiment dropped to 97.5 from a revised 101.2 in June. This was much weaker than expectations for a reading of 100.0 and took the index to its lowest level since September 2005.
But the euro's losses were limited by gains against sterling, which suffered broadly after data showed the steepest decline in UK retail sales in May on record.
And given the apparent bleakness of the Ifo headline data, the euro's losses weren't as heavy as they might have been. The dollar's initial advance against the euro was also halted in its tracks as weakness in European equities pointed to a lower open on Wall Street and as oil prices rebounded back above $125 a barrel.
"The euro has not exactly suffered a great deal on the Ifo. The bad [economic] news for the euro looks like it's pretty much in the price," said Peter Frank, senior currency strategist at Société Générale in London.
"It [Ifo] doesn't look that bad although it is trending downwards. It's easy to over-dramatise… although what is clear is there's nothing but deterioration in other [eurozone] countries." At 1100 GMT the euro was down a slender 0.1 per cent on the day at $1.5675. It earlier slipped as low as $1.5637 immediately after the Ifo report, which followed data showing falls in manufacturing and service sector activity in France, Germany and the wider euro zone.
The biggest mover among the major currencies in European trading yesterday was sterling, which fell around 0.5 percent against the euro and dollar on the 3.9 per cent fall in May UK retail sales.
At 1045 GMT the pound was down at $1.9860, down over a cent on the day, while the euro was up at 78.95 pence.
The euro's strength against sterling helped shield it from broader selling pressure following the Ifo and eurozone PMI data. But this reprieve may be only temporary and could eventually force the European Central Bank to adopt a more dovish stance on interest rates.