LONDON, Oct 2 - The dollar recovered off earlier three-month lows against the euro on Thursday although sentiment remained fragile ahead of key U.S. jobs data, while Japanese intervention jitters lent it support versus the yen. The European Central Bank left interest rates on hold at two percent at its regular policy meeting, as widely expected, with dealers more closely focused on the news conference and U.S. weekly jobless claims data, both at 1230 GMT. The euro was pegged down nearly a cent against the dollar by 1155 GMT, having hit three-month highs at $1.1768 in Asian trade, and analysts said its recent rally could be losing steam. The euro has risen more than 2.5 percent against the dollar so far this week. "The market does feel a bit stretched and with the moves up in equities and down in bonds that tends to be dollar positive," said Adam Cole, senior currency strategist at Credit Agricole Indosuez.
U.S. stocks jumped two percent on Wednesday, while euro zone bonds lurched in the opposite direction. German Bund futures posted their biggest one-day fall in a month on Thursday on reports of a large sell order hitting the market. The U.S. currency was up around half a percent against the yen at 111.11 , though still only one yen away from three-year lows, after the Bank of Japan was strongly suspected of dollar buying intervention in Asian trade. "Also in the melting pot you've got the BOJ...it looks like they have been in the market again, though they haven't confirmed it, and that is helping to put a temporary floor under the dollar," said Cole. A senior Finance Ministry official declined to comment on whether Tokyo had intervened or not, saying it would only disclose its actions immediately if it intervened through an overseas central bank -- as it did through the Federal Reserve Bank of New York on Tuesday.
U.S. JOBS DATA EYED
Underlying sentiment in the dollar was remained fragile, with investors worried about a possible rise in U.S. weekly jobless claims especially as this week's economic indicators all point to a soft payrolls report on Friday. Initial claims are expected to rise to 395,000 in the week ended September 27 from 381,000 the previous week, when this number contracted to its lowest since early February. On Wednesday, the Institute for Supply Management index of manufacturing activity fell to 53.7 from 54.7 in August, falling short of a consensus forecast. "Investor faith in the U.S. recovery story has taken a fairly pronounced knock, which you can seen in the dollar's value," said Steven Pearson, chief currency strategist at Halifax Bank of Scotland Treasury Services. The ECB rate decision came as no surprise, but analysts said the monthly news conference would be watched for possible comments on the euro's latest surge from ECB President Wim Duisenberg. "The ECB's top priority is currency stability. If your goal is price stability you don't want big moves up or down," said Aziz McMahon, currency analyst at ABN Amro.
WAR CHEST
Inflows into Japan showed some signs of abating with MOF data indicating foreign investors had turned net sellers of Japanese stocks last week. But traders said that was likely to be a temporary move related to the end of the quarter and sentiment was even more positive given Wednesday's upbeat "tankan" business survey from the BOJ and a resumption of a bull run in Tokyo stocks <.N225>. The Nikkei stock average ended up 2.24 percent. To counter such flows and curb any export-damaging yen rise, Japan conducted a record 13.5 trillion yen of yen-selling intervention in the first nine months of this year. Sources at the MOF said the ministry was considering expanding the borrowing limit for its foreign exchange account -- the war chest for its yen-selling intervention -- by up to 20 trillion yen ($180.7 billion) from 79 trillion yen currently.//