(Update 3: Tues 02/09/14 19:36:19)
LONDON/TOKYO/SYDNEY (Sept 02): The euro slumped to a fresh one-year low against a broadly strong dollar on Tuesday on persistent speculation that the European Central Bank will introduce more aggressive monetary easing.
The dollar reached its highest since July 2013 against a basket of major currencies and traded at 105 yen for the first time in eight months.
The ECB will hold a policy meeting on Thursday and its post-meeting news conference will be closely watched for any signs that President Mario Draghi is moving towards full-scale quantitative easing - effectively the printing of money - to boost the flailing euro zone economy.
Since Draghi said he would use "all the available instruments" to ward off the threat of deflation at a U.S. Federal Reserve conference in Jackson Hole last month, speculation that the ECB will introduce QE has ramped up.
Weak data added fuel to market chatter on Monday: euro zone factories barely increased prices last month, while French manufacturing activity fell at the fastest pace in 15 months. A separate report confirmed the German economy contracted in the second quarter.
That all helped to send the euro to a trough of $1.3110 on trading platform EBS on Tuesday, its lowest since September 2013.
But that move was modest compared with the dollar's gains across other currencies, including a 0.7 percent gain against the yen and a 0.5 percent rise against sterling.
"This (the euro's trough) is not just about the ECB. Part of this is a dollar story - the dollar has outperformed a whole bunch (of developed world currencies)," said Jane Foley, a senior currency strategist at Rabobank in London.
Foley added that increased momentum around the idea that the ECB would loosen policy, and that the Bank of Japan would introduce another round of QE, was driving the dollar's gains, with a perception that it was "the best of the bunch".
Later on Tuesday, an Institute of Supply Management report on the U.S. manufacturing sector could provide further evidence of economic improvement and highlight the diverging paths between the United States and euro zone economies.
Expecting too much?
Some, however, said the market might be expecting too much from Thursday's ECB meeting, even if further easing might be announced later down the line.
Sources from within the central bank told Reuters last week that new action at its meeting this Thursday was unlikely but not impossible, and that the barrier to QE was still "very high".
"Ahead of the ECB I would be a little bit cautious on the euro because it looks like a lot is now priced in following Draghi's comments at Jackson Hole, and there's a risk that those market expectations of policy action are overdone," said Ian Stannard, head of European currency strategy at Morgan Stanley.
"If we do get the ECB not quite meeting those expectations then we could get the euro rebounding off the back of that (against the dollar) in the very near term."
Other European currencies also suffered on Tuesday.
Sterling was hit by a poll that showed support growing for the "yes" vote in a referendum later this month that could see Scotland splitting from the rest of the UK.
The pound fell almost a cent to as low as $1.6518, close to a five-month low of $1.6501.
One-month sterling/dollar implied volatility was on track for its biggest daily rise in three years, jumping to 6.10 percent, its highest level in five months.
And the dollar hit its highest since November 2013 against the Swiss franc, rising to 0.9212 francs, after data showed the Swiss economy stalled in the second quarter.