By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - The euro fell to a two-month low against the dollar on Wednesday, weighed down by weak economic data that bolstered expectations that the European Central Bank could undertake aggressive monetary policy easing as soon as this week.
The dollar was little changed against a basket of currencies after three straight days of gains, trading in narrow ranges ahead of monetary policy meetings at the ECB on Thursday and the Federal Reserve next week.
U.S. data on Wednesday overall were weaker than expected, with manufacturing activity slowing to a near 10-year low in early July. U.S. new home sales rebounded in June, but sales for the prior three months were revised lower.
Yasemin Engin, assistant economist at Capital Economics in London, said the U.S. manufacturing data "adds support to the widely-held expectation that the Fed will cut interest rates next week, despite the relative strength of some of the recent hard data."
In the euro zone, money markets are pricing in a 54% chance of a 10-basis-point cut at Thursday's ECB meeting.
The probability rose after the eurozone purchasing managers' index unexpectedly fell to a three-month low of 51.5 in July from 52.2 in June. Economists polled by Reuters had expected a slight decline to 52.1.
The 50 mark separates economic growth from contraction.
"Our base case looks for a dovish message overall but nothing further to be delivered at this stage," said Ned Rumpeltin, European head of FX strategy at TD Securities in London. "A significant dovish shift tomorrow could still push (the euro) lower into a new trading range below $1.11."
In afternoon trading, the euro was down 0.1% at $1.1137
The euro has shed 2% of its value this month as investors priced in the probability of euro zone borrowing costs falling deeper into negative territory.
The dollar was 0.1% lower against the yen at 108.17 yen
The greenback showed little reaction to the testimony of former Special Counsel Robert Mueller to U.S. Congress, who said on Wednesday he had not exonerated President Donald Trump of obstruction of justice.
The dollar gained the previous day after Washington reached a deal to lift government borrowing limits, which analysts said could limit the Fed's appetite for rate cuts.
The pound rose slightly from recent lows after Boris Johnson on Tuesday won the contest to be Britain's next prime minister, focusing investor attention on the prospect of a no-deal Brexit.
Sterling was last up 0.4% at $1.2483
The pound extended gains after Johnson, in his first speech as prime minister, promised to lead Britain out of the European Union on Oct. 31 with "no ifs or buts" and warned that if the European Union refused to negotiate then there would be a no-deal Brexit.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Sonya Hepinstall)
