Euro's bullish momentum stalls

Bullish euro momentum stalled on Tuesday after the single currency hit a record peak against the low-yielding Japanese yen, with sentiment hurt as a measure of German investor confidence surprisingly fell in June.
The ZEW economic sentiment index, measuring investor sentiment on the outlook for the eurozone's largest economy, fell to 20.3 from May's 24.0, sending the euro to session lows against the dollar and well away from a record peak hit earlier above 166 yen.Analysts said that although the ZEW index did not materially alter near-term expectations of at least one more European Central Bank rate hike this year from the current 4 percent, the surprise drop dented sentiment.
"The ZEW spoilt the party. The data wasn't dramatically bad but it was weaker than expected. With eurozone data we've become accustomed to getting stronger readings, so a weak reading is bad news and that's why the euro is back below $1.34," CIBC World Markets economist Audrey Childe-Freeman said.
The yen was mired near 4-1/2 year troughs versus the dollar, with sentiment still positioned against it as investors continued to favour higher-return units. The yen had weakened across the board since the Bank of Japan last week kept interest rates on hold at 0.5 percent and Governor Toshihiko Fukui said he had no preconceived ideas about a future rate rise, dousing expectations of a hike in July.
Most market players are looking for the BOJ to raise rates to a 12-year high of 0.75 percent in August, but such a move is not expected to dull the allure of carry trades - borrowing cheaply in low-yielding units to buy higher-yielding currencies.
By 1119 GMT, the euro was down slightly on the day at $1.3398 after hitting session lows on the ZEW figures, while it fell 0.2 percent to 165.53 yen after hitting a record peak of 166.11, according to Reuters data.
The dollar was broadly steady at 123.51 yen, near its 4-1/2-year high of 123.75 yen set the previous session. The high-yielding Australian and New Zealand dollars, among the most popular for carry trades, hovered near 16-year and 20-year highs respectively against the yen.
Market players will now look to figures on US housing starts and building permits for May at 1230 GMT to see if a downturn in the housing market, a soft spot for the economy, has finally bottomed out. Some soft underlying US inflation, consumer sentiment and housing data have dimmed the outlook for US rates and growth slightly.
Economists forecast that housing starts would slow to an annualised 1.480 million in May from 1.528 million in April. "With US rate futures now implying no material change in US rates out to early 2009, softer housing numbers will weigh on the dollar," RBC Capital markets said in a note to clients.
Elsewhere, the Canadian dollar fell briefly versus the US dollar after annual Canadian core inflation data came in softer than expectations, but any lasting impact on monetary policy was seen as limited with most economists still pointing to Bank of Canada monetary tightening later this year.
Canada's annual core inflation rate settled down to 2.2 percent in May from a four-year high of 2.5 percent in April, Statistics Canada said. "We may see a moderate sell-off in the Canadian dollar on the back of the lower year-on-year core inflation rate. But I would expect any selling to be quite limited as we would expect (inflation) to bounce right back in June," said Adam Cole, senior currency strategist at RBC Capital Markets.