LONDON, May 5 - The euro paused near last week's four-year high against the dollar in holiday-thinned trading on Monday ahead of rate verdicts from key central banks this week, including the Federal Reserve and the European Central Bank. Increasing concerns about the U.S. economy and returns on dollar-denominated assets have directed flows into the euro zone recently, buoying the single currency to $1.1287 last week. But trading is thin due to holidays in Tokyo and London, with little to galvanise the market until U.S. services sector data from the Institute of Supply Management due at 1400 GMT. "We need to wait until the New York open to get some direction and then we get the ISM non-manufacturing data which might give us some clues," said Peter Fontaine, foreign exchange strategist at KBC in Brussels.
By 0950 GMT the euro stood at $1.1215 , within a cent of last week's high. Against the yen it stood at 133.40 , having risen to a four-year high of 133.78 on Friday. Against sterling it was trading at 69.87 pence , having risen to a four-year high of 70.12 also on Friday. The euro edged higher against the Swiss franc to 1.5126 , near last week's 1-1/2 year high, following comments by Swiss National Bank directorate member Niklaus Blattner. He said in a newspaper interview he was pleasantly surprised the upward pressure on the Swiss franc had eased so quickly. Blattner added the SNB could still create liquidity or intervene on the currency markets should the franc spike higher against the euro, the currency of its main trading partners.
FED DECISION
Economists are expecting the Fed to leave rates at four decade lows of 1.25 percent when it meets on Tuesday, but poor data in recent weeks have fanned expectations it might concede there are risks to the economy in its accompanying statement. "The market expects no rate change from the Fed but there is some speculation they are leaning towards an easing bias, which is negative for the dollar because the market is focused on yield differentials," said Niels Christensen, currency strategist at Societe Generale in Paris.
"Economic data from the U.S. has been disappointing except for confidence data. But the Fed might take comfort from the resilient stock markets and they could be unofficially happy about the weakening dollar which eases deflationary pressure and helps rebalance the current account deficit." The ISM non-manufacturing index is expected to show signs of improvement although an average of economists' forecasts put the index at 49.1 in April from 47.9 in March, just below the 50 level which divides expansion from contraction. U.S. labour data on Friday came in mixed, with the unemployment rate rising to six percent as the economy shed 48,000 jobs against forecasts of a 5.9 percent jobless rate and 53,000 lost jobs. Major U.S. stock indices closed between 1.5 and 2.0 percent higher on Friday as investors pinned their hopes on an eventual economic recovery. But the dollar failed to follow suit. "What we've found recently is that there's been a disconnection between equities and the dollar," KBC's Fontaine said. "This has been missing for a time now and that's a big problem for the dollar." In Europe, the European Central Bank meets on Thursday but few expect it to lower interest rates from the current 2.50 percent even though European manufacturers are making noises about the strength of the euro. The head of Volkswagen AG's luxury unit Audi, Martin Winterkorn, told a German Sunday newspaper if euro/dollar went much higher it would become an increasing problem.
"We have almost reached the pain limit with the euro/dollar rate," he said. The euro has gained seven percent against the greenback just since the start of this year. The Bank of England also meets on Thursday and views are divided whether it will ease again following a surprise rate cut in February. But economists polled by expect a 25 basis point rate cut due to a weak global outlook and slowing domestic demand. In Japan, a Jiji Press report on Friday that Japan would call for yen-weakening intervention as part of a stimulus package expected to be announced this week kept the yen below last week's one-month high against the dollar of 118.12 //