The euro languished near a 22-month low on Thursday, weighed down by ailing growth in Germany and the spectre of political uncertainty in Spain. A surprise drop in German business morale has highlighted the divergence between economic data in the United States and the eurozone.

The European Central Bank in March pushed out the timing of its first post-crisis rate hike until 2020 and its policymakers are still expressing worries about economic growth.

That is impacting the euro which on Thursday suffered its worst day in over six weeks, falling 0.6 per cent to a 22-month low of $1.1141.

It traded flat on Thursday at $1.1154.

“Political uncertainties combined with economic concerns are a rather bad cocktail for the euro. In particular if the economy on the other side of the Atlantic is humming,” Antje Praefcke, an analyst at Commerzbank, wrote in a note to clients.

Praefcke said a polarised election in Spain on Sunday could further dampen the euro’s prospects.

The vote is being fought on emotive issues including gender equality and national unity following Catalonia’s failed 2017 independence bid.

Market participants awaited policy decisions by the Swedish and Turkish central banks.

Sweden’s Riksbank is likely to keep its benchmark rate unchanged and may be forced to delay plans to tighten policy later in 2019, a Reuters poll of analysts published on Tuesday showed.

The Swedish crown was down 0.2 per cent at 9.4190 crowns, a six-week low, ahead of the decision.

“The Riksbank may push further out the timing of the next rate hike, and also the market may speculate it’s too early for a rate cut by the Turkish central bank,” said Mizuho’s Yamamoto. “That could be a negative for these currencies and positive for the dollar.”

The greenback rallied to a 23-month high of 98.189 against a basket of key rivals overnight while gaining more than half a per cent, largely propelled by the euro’s weakness. The index last traded 0.15 per cent lower at 98.027.

Investors will watch the release on Friday of US gross domestic product data for the first three months of 2019, for signs of whether the United States remains stronger than other leading economies.

Meanwhile the Germany’s benchmark 10-year government bond yield held below zero per cent on Thursday, a day after a disappointing German Ifo sentiment survey that exacerbated concerns about the euro zone’s economic outlook.

Having hit one-month highs just a week ago, weak data from powerhouse economy Germany have pushed bond yields back towards recent 2-1/2 year lows deep in negative territory.

News overnight only added to a sense that world economic conditions remain weak − providing a supportive backdrop to fixed income markets. South Korea’s economy unexpectedly contracted in the first quarter of the year, while the Bank of Japan on Thursday pledged to keep interest rates “extremely low” at least through early 2020.

And the Bank of Canada on Wednesday held interest rates steady but removed wording in its statement about the need for future hikes.

“The subdued global economic backdrop and the dovish tone from central banks means a continuation of the trend in bonds markets seen in recent days,” said Commerzbank rates strategist Rainer Guntermann.

“The eurozone economic data, starting with the PMIs last week have been weaker than expected.”

Germany’s 10-year Bund yield was steady at minus 0.014 per cent, having dropped back into negative territory after Wednesday’s Ifo sentiment index fell short of expectations. Most 10-year eurozone bond yields were also little changed after hefty falls of 5-6 basis points the previous day.

The gap between short and long-dated German bond yields was a touch wider at 59 basis points, having tightened the previous day to around 51 bps − its narrowest in almost a month.

There was some focus on Spain, which holds a general election this weekend. The gap between Spanish and safer German government bond yields has widened this week, alongside peripheral peers − a move analysts attributed to some caution ahead of the Spanish elections and Friday’s S&P review of Italy’s ratings.

Spain’s election is its most divisive in decades and the outcome is uncertain, with no single party close to winning a parliamentary majority. Outgoing Prime Minister Pedro Sanchez looks best placed to form a government if his Socialist Party wins the around 30 per cent of the vote that polls have suggested.

“We can’t say for sure what the make up of the next coalition will be, but I don’t think it will challenge the consensus on Europe,” said Michael Krautzberger, head of BlackRock’s pan-European fixed income team. “So I’m not too nervous about the Spanish election.”

Reuters