The euro held within sight of a record high against the dollar this morning after a strong reading of German business sentiment supported bullish euro zone interest rate expectations.
By contrast the dollar weakened to its lowest since 2005 versus a basket of currencies after soft housing and confidence data backed growing expectations for the Fed to cut US borrowing costs this year.
The April German Ifo business sentiment index was 108.6, just above a forecast of 108 and above the March reading of 107.7, while the current conditions and expectations indices also beat forecasts.
There had been market whispers of the headline index reading 110.0, some traders reported.
"The German economy is expected to continue to grow quite strongly in the first quarter. We had comments from the Ifo that euro zone interest rates shouldn't rise much above 4 per cent and that's in line with some of the mood music that we have been hearing from the euro zone," said Tom Vosa, head of market economics at nabCapital.
"The market has certainly been expecting June (ECB hike) for a long, long time. The concentration is on whether the ECB will go much above 4 per cent," he added.
The euro was steady at $1.3646, near an two-year peak hit earlier at $1.3655 and close to a lifetime high of $1.3670 struck in December 2004.
The dollar index was at 81.404 after dropping to a two-year low of 81.365 earlier in the session. A move below 80.42 would mark its lowest since April 1995, according to Reuters data.
The dollar was flat at 118.50 yen, staying in the tight 118-119 yen range it has clung to since late last week.
The euro traded around 161.68 yen, not far from the 162.43 yen touched earlier in the month, the highest since the currency was introduced in 1999.
Information yesterday showed US existing home sales posted their biggest monthly drop in 18 years and consumer sentiment hit an eight-month low, fuelling speculation that the Fed may cut interest rates from 5.25 per cent.