LONDON The euro dipped and bond yields hit multi-week lows on Thursday as easing inflation in Spain and Germany led investors to row back further on expectations of when the European Central Bank might tighten monetary policy.
The single currency dipped 0.3 percent against the dollar and the yield on Germany's 10-year government bond, the benchmark security for the region, hit a three-week low.
Signs of economic strength and strong inflation data - and an acknowledgement of these factors by policymakers - fuelled talk that the ECB might soon switch out of stimulus mode and follow in the footsteps of the U.S. Federal Reserve, which has embarked on a rate hike cycle.
But annual consumer inflation in Spain eased to 2.1 percent in March, missing Reuters poll forecasts of 2.7 percent, and regional German data pointed to a similar downturn in Europe's biggest economy.
"The Spanish numbers (are) pretty weak... and German regional numbers have also seen a fair bit of slowing... I suspect that's another reason you have a weakening euro," said Investec economist Ryan Djajasaputra.
On Wednesday six sources in and close to the ECB governing council told Reuters euro zone policymakers were keen to reassure investors that their easy money policy was far from ending.
Prior to that report, money markets were pricing in the possibility of an ECB rate hike in December and fully pricing one in for next March. Both were seen as less likely on Thursday.
Euro may have also come under pressure after British Prime Minister Theresa May formally began Britain's exit from the European Union on Wednesday, launching a two-year negotiation process before the divorce comes into effect in late March 2019.
Sterling was down 0.13 percent at $1.2415, having skidded to a one-week low of $1.2377 overnight after British Prime Minister Theresa May formally launched Britain's divorce proceedings from the European Union.
Oil prices, up on disruptions in Libya, buoyed European stocks, which were up 0.8 percent while the broader Euro STOXX 600 was up 0.1 percent.
Earlier, Asian stocks came off two-year highs on a strengthening dollar, up 0.14 percent against a basket of six currencies on Thursday morning.
Reassurance overnight from U.S. policymakers went some way towards bolstering faith in the economic and policy direction of the world's richest country, giving support to the dollar.
The greenback edged up against a basket of six major currencies and stayed off four-month lows hit against the Japanese yen earlier this week.
It fell last week after the failure of President Donald Trump's U.S. healthcare reform bill brought the "Trumpflation" trade into doubt.
Chicago Federal Reserve President Charles Evans, a voter on the policy-setting Federal Open Market Committee, said on Wednesday he supported further interest rate hikes this year given progress on the Fed's goals of full employment and stable inflation.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(editing by John Stonestreet)