FOREX-Euro at 7-week lows as economic outlook darkens; yen slips

The euro struggled at seven-week lows against the U.S. dollar on Tuesday as concerns about extended lockdowns dampened sentiment towards the single currency. Data showed retail sales in Germany, Europe's biggest economy, plunged by more than forecast in December, amplifying concerns that the euro zone is set for a double-dip recession in the first quarter of 2021.

"Things are looking even more depressing here," Commerzbank strategists said in a daily note. "The German retail sales for December disappointed massively, presenting a first taste of how the service sector is suffering under the current European lockdowns, which is likely to be reflected in the corresponding PMIs (purchasing managers' indexes) over the course of the week."

Against the dollar, the euro was trading at $1.2078, just above an early December low of $1.2056 hit in the previous session. It has weakened more than 2% from an early January peak of near $1.2350. The dollar index eased a touch by 0.1% to 90.87 amid further gains for global stocks but stayed not far from its overnight peak of 91.063, its strongest level since Dec. 10.

The dollar also benefited from a massive bout of short-covering, especially against the yen where hedge funds had racked up their biggest short bets against the greenback since October 2016. Against the yen, the dollar briefly crossed 105 yen for the first time since mid-November and held firm at 104.875 yen .

Many see the dollar's rebound since early last month as a correction after its relentless decline - the dollar index lost almost 7% in 2020 - on expectations of a global recovery from the pandemic amid massive fiscal spending and continued ultra-easy monetary policy. Elsewhere, the Australian dollar pared gains after the country's central bank said it will extend its quantitative easing programme to buy an additional $100 billion of bonds, a decision that many market players thought could wait until next month.

The Aussie last stood at $0.7634, a touch higher on the day but off the day's high of $0.7662.

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