U.S. Dollar banknotes are seen in this illustration picture taken June 14, 2022.
U.S. Dollar banknotes are seen in this illustration picture taken June 14, 2022. Reuters / FLORENCE LO

The euro weakened broadly on Thursday as disappointing German and French PMI data confirmed the euro zone economy is struggling to gain traction, prompting traders to trim bets on big interest rate hikes from the European Central Bank.

High prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 when the coronavirus pandemic was taking hold, with S&P Global's headline factory Purchasing Managers' Index (PMI) falling to a near two- year low of 52.0 from 54.6.

"The PMIs were certainly not so strong as anticipated," said Stuart Cole, head macro economist at Equiti Capital in London.

"The ECB, therefore, will take note of today's numbers, but will look for evidence that the picture they are painting is being played out in the hard data before changing tack."

Following the data, money markets were pricing in about 30 basis points (bps) of rate hikes in July compared to 34 bps on Monday. Traders also trimmed their expectations of how much the ECB will hike rates by the end of 2022 to 161 bps compared to 176 bps on Monday.

Against the U.S. dollar, the single currency declined 0.6% to $1.0498, falling below the $1.05 line for the third time this week. The euro declined more than 1% versus the Japanese yen

The euro's losses pulled the dollar away from earlier lows and sent the greenback into positive territory against its rivals after cautious comments by Federal Reserve Chair Jerome Powell on Wednesday weighed on sentiment.

While markets have steadfastly held to the view the Fed is on track to raise interest rates by another hefty 75 bps in July, some analysts believe the ECB and the Bank of England will adopt a softer rate increase path or risk damaging growth.

Fed Chair Jerome Powell said on Wednesday a recession was "certainly a possibility," reflecting fears in financial markets that the Fed's tightening pace will throttle growth. Powell testifies to the House later in the day.

The Norwegian crown also failed to get a boost after Norway's central bank raised its benchmark interest rates by 50 bps on Thursday, its largest single hike since 2002 and twice as much as expected by most economists.

The crown briefly rose against the dollar after the rate announcement but then retreated as the dollar gained strength broadly against major currencies. The crown was last down 0.6% versus the dollar and was virtually flat against the euro.