The euro fell to a two-month low against the dollar on Wednesday, hit by weak economic data and speculation that the European Central Bank may start easing policy as soon as this week.

Money markets are pricing in a 45 per cent chance of a 10 basis points cut on Thursday. The ECB could also signal further reductions down the road or a fresh round of quantitative easing, said Esther Maria Reichelt, an analyst at Commerzbank. “It won't be just about the (possible) rate cut,” she said.

Euro overnight implied volatility gauges rose to their highest since mid-December at 11.6 vol, while the common currency weakened by 0.2 per cent to $1.1127, the lowest since May 30.

The euro has shed 2.1 per cent of its value this month, as investors priced in the probability of euro zone borrowing costs pushing further into negative territory.

This view was enhanced by German composite flash purchasing managers' index falling unexpectedly to 51.4 in July from 52.6 in June, below a Reuters poll of a slight decline to 52.3. French composite PMI was also weaker than expected.

A broadly stronger dollar also contributed to the euro's woes.

The US currency firmed after Washington reached a deal on Monday to lift government borrowing limits, which analysts said could serve as a reason for the US Federal Reserve not to cut interest rates aggressively and support the dollar.

Its index against a basket of currencies was flat at 97.66, having edged up to a five-week high of 97.76 earlier, following gains of nearly 0.5 per cent the previous day.

“In addition to the euro's weakness ahead of the ECB meeting, the dollar is supported as market participants continue to discount the likelihood of the Fed cutting rates by 50 basis points at next week's FOMC (Federal Open Market Committee) meeting,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust.

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