LONDON, July 1 - The euro held firm against the dollar on Tuesday as market caution ahead of U.S. manufacturing data later in the session outweighed weaker than expected manufacturing surveys in the euro zone. The Eurozone Purchasing Managers' Index for manufacturing slid further below the 50 line that separates growth from contraction in June but analysts said the region's weak outlook was no surprise. "Euro/dollar is in a holding pattern now and will likely remain happily in a range until the ECB (European Central Bank) comes back from vacation after the summer," said Tom Vosa, market economist at National Australia Bank in London.
"The PMI confirmed what we already knew," he said. By 1005 GMT, the euro was a third of a percent higher on the day at $1.1551 after a late climb from six-week lows on Monday following weaker than expected regional manufacturing data out of the United States. With euro/dollar awaiting the U.S. data, there was more action on the high-yielding Australia and New Zealand dollars which surged to five-year peaks on the U.S. dollar as bulls hoped the Reserve Bank of Australia would keep interest rates on hold later on Tuesday. Fears of monetary easing and continued economic troubles also sank the Norwegian crown to three-year lows on the euro . The Swiss franc hit its lowest on the single currency in nearly three years on domestic economic concerns.
GAINS FROM LOW BASE
The euro zone's biggest economy, Germany, was the only one of the eight countries covered by the manufacturing PMI survey where the production index rose a little. Nevertheless the German survey still showed output shrinking and new business contracting sharply. In contrast, the U.S. Institute of Supply Management (ISM) due at 1400 GMT is forecast to show an improvement in manufacturing activity, rising above the 50 level which divides expansion from contraction to 51.0 compared with 49.4 in May. Nevertheless traders remain cautious ahead of the data, with Monday's Chicago figures unnerving a market looking for evidence to back up recovery optimism that has appeared in the past week. In Japan, a stronger than expected "tankan" survey of Japanese business sentiment pushed the yen and the Nikkei share average higher before a fall in the government bond market and nervousness about potential official yen-selling intervention reversed its gains. Japanese authorities have been intervening covertly in the past few months to stem unwanted yen strength.
The yen was holding steady on the day at 119.80 per dollar having fallen to a two-month low beyond 120 on Monday.
ATTENTION ELSEWHERE
Australia's central bank is due to announce its interest rate decision late on Tuesday and markets are split nearly evenly in forecasting a "no change" decision or a rate cut. The Aussie surged sharply to U.S.$0.6762, building on this year's 20-percent gain on the greenback, and analysts said there could be a further rally in store if rates were held steady. "If they don't cut rates the Aussie could go through 70 U.S. cents," said Tom Vosa, who expected a quarter-point cut in the 4.75 percent cash rate.
In Norway, the previous session's enthusiasm about potential crown-boosting privatisation inflows gave way to expectations of further interest rate cuts. Dealers said that despite earlier speculation, most of the inflows from the $1 billion sale of a stake in state-controlled telecom firm Telenor would not actually reach the spot foreign exchange market and hence would not give support to the crown. "The buyers will borrow the crown in the swap market to buy shares and when they sell the shares back into the market, they will close the swap deals," said one dealer at a Scandinavian bank.//