NEW YORK: The euro sagged on Tuesday to fresh one-year lows against the dollar on bets the European Central Bank will do more to help a wobbly euro zone economy, while the pound fell to a near five-month low versus the greenback on worries about a Scottish secession.
The dollar rose against a basket of major currencies, hitting its highest since July 2013. It traded above 105 yen for the first time in eight months on signs of relative strength in the world's biggest economy.
The ECB will hold a policy meeting on Thursday and traders will watch for signs President Mario Draghi is moving towards quantitative easing, which would pump more cash into the economy in a bid to stimulate lending and spending.
Such a move however would hurt the euro, which has declined 3.4 percent against the dollar in the past three months and 1.1 percent against the yen.
"For the ECB, expectations for further stimulus are being restrained by the need to see a full implementation of measures announced in June, as well as some concerns about the lack of political support for more aggressive stimulus at this time," said Eric Theoret, Scotia Bank's currency strategist in Toronto.
Monday's disappointing regional economic data stoked speculation on the ECB adopting QE later this week.
Some, however, said the market might be expecting too much from Thursday's ECB meeting, even if further easing might be announced later down the line.
The euro hit a trough of $1.3110 on trading platform EBS on Tuesday, its lowest since September 2013, before recovering to $1.3128 in early U.S. trading, little changed from Monday's close.
U.S. financial markets were closed on Monday for the Labor Day holiday.
The greenback also gained against other major currencies as U.S. yields rose and Wall Street stock prices opened higher.
Data supported the view the U.S. economy continues to expand at a modest pace. The Institute for Supply Management said its U.S. manufacturing activity index rose to 59.0 in August, the strongest since March 2011. July construction spending posted its highest level in over 5-1/2 years.
The dollar hit its highest since November against the Swiss franc, rising to 0.9200 franc after data showed the Swiss economy stalled in the second quarter.
STERLING WEAKENS
The British pound sank on a poll that showed support growing for the "yes" vote in a referendum later this month that could see Scotland splitting from the rest of the UK.
The pound fell almost a cent to as low as $1.6510, close to a five-month low of $1.6501.
One-month sterling/dollar implied volatility rose to 6.125 percent, its highest in five months.
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