LONDON (AFX) - The euro drifted slightly lower against the dollar in quiet midday trade, after losing gains made on yesterday's market talk of corporate- related euro buying, dealers said.
"The supposed demand finishes, the euro drifts back again," Bear Stearns' currency strategist, Steve Barrow, said.
Halifax chief economist Adam Chester agreed and also pointed to rising overnight U.S. equity prices as supportive of the dollar today. But both believe there is light at the end of the tunnel for the euro.
"The worst of the sell-off is now over," said Chester.
Barrow added, "I think we're possibly at a turning point for the euro. For the last couple of weeks we've had news which has generally been pretty bad for the euro. And yet the euro hasn't gone down. That rather suggests that despite what's gone on with interest rates, the market might be giving the ECB a little bit more the benefit of the doubt and the U.S a little less."
He also pointed to uncertainty regarding the Federal Reserve's rate direction, as general economic weakness in the U.S. co-exists with pockets of strength.
"It's not giving the market a clear direction of what's going on. The market needs to see some of its questions answered on whether the Fed's done enough, not enough, or too much. We think they'll take rates down to 3 pct," he said.
But Barrow believes further cuts will spark discontent amongst investors, which could have a positive effect on the euro. "They'll ask whether the Fed has overcooked the book," he said. He also highlighted underlying data as indicative of a euro rally. "The underlying data does not imply the sort of outflows from the euro area that maybe we've been used to and have seen pretty much since its inception.
"There's some meat on the story of a stronger euro from here on, although it will probably take a lot more yet before confidence really develops."
Meanwhile, sterling came off opening lows, following the euro, partly because of a sell-off of the euro against the dollar. Sterling was boosted also by stronger-than-expected UK April retail sales volumes, dealers said.
Retail volumes rose 0.6 pct on a seasonally adjusted basis from March and were up 5.9 pct from a year earlier, National Statistics said.
The AFX News median of analysts' forecast was that April sales rose 0.3 pct from March and 5.3 pct year-on-year.