NEW YORK: The euro edged lower against the dollar on Wednesday, pressured by soft German economic data, but losses were limited by hopes the European Central Bank may soon take action to lower Spanish and Italian borrowing costs.
Adding to pressure on the euro were comments from Eurogroup President Jean-Claude Juncker that a Greek exit from the euro zone would be manageable but is not desirable.
Industrial output in Germany, the euro zone's biggest economy, fell more than expected in June. Separate data showed German imports fell in June for the second time in three months, and exports also dropped.
"The reports reminded investors that regardless of what the ECB does to bring down government borrowing costs, the real economies of Europe, even Germany's, continue to decline," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The euro fell 0.4 percent to $1.2355, after hitting a one-month high of $1.2443 on Monday. It hit a session low of $1.2325 after dropping past reported stop-loss orders at $1.2350, before recovering slightly.
Traders said the euro's outlook remained positive on the daily charts for as long as $1.2132 minor support holds, which is this month's low.
The euro zone common currency has staged a rebound since hitting a more than two-year low of $1.2040 late last month after ECB President Mario Draghi said the bank would do whatever it takes to save the euro.
Since Draghi's comments, "volatility has been pushed lower and EUR is well supported. We would expect the euro to fall within a broad range between $1.21 and $1.26, with a catalyst for a breakout only emerging in September," said Camilla Sutton, chief currency strategist at Scotia Bank in Toronto.
The euro also fell against sterling, which rallied after Bank of England Governor Mervyn King appeared cautious about future interest rate cuts, surprising investors. The euro last traded down 0.6 percent at 78.85 pence.
Against the dollar, sterling reversed earlier losses to hit a session high of $1.5677. It was last up 0.2 percent at $1.5653. Traders had sold the pound in recent days on expectations that downbeat BoE forecasts would lead speculators to position for more monetary easing.
The BoE slashed inflation and growth forecasts in its Quarterly Inflation Report as the euro zone crisis continued to take a toll.
The dollar slid 0.2 percent to 78.45 yen. The euro lost 0.6 percent to 96.86 yen.
The dollar has stayed in a range between 77.90 and 78.80 yen for the past two weeks. But analysts said expectations of more US monetary easing may hurt the dollar.
Boston Federal Reserve Bank President Eric Rosengren, who is known to favor a more activist approach to stimulating growth, said on Tuesday the Federal Reserve should launch another bond-buying program of whatever size and duration was necessary to get the economy back on its feet.
Traders also said there was potential for fund repatriation by Japanese institutional investors, which could also weigh on the dollar against the yen in the near term.
August typically sees large bond redemptions in US Treasuries as well as coupon payments, and traders say Japanese investors holding Treasuries could potentially sell the dollar against the yen to bring home some of the proceeds.
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