The euro hovered above the previous week's lows on the dollar and held firm on the yen on Monday as expectations ebbed that the European Central Bank (ECB) would cut rates this week to sap the euro's strength. Euro bulls were also relieved that a meeting on Friday between U.S. President George W. Bush and German Chancellor Gerhard Schroeder did not produce any surprises on foreign exchange, with both leaders repeating their official lines on forex policy. The market turned its attention to two key events this week -- the ECB meeting on Thursday and Friday's non-farm payrolls data from the United States which will be a determinant for expectations of higher interest rates there. "We have key information coming from both angles. At these levels we're in no man's land, which makes sense as the market is trying to work out what the next step is going to be," said Shahab Jalinoos, senior currency strategist at ABN Amro in London. "The market never got down to test the euro/dollar year lows on Friday so we have a degree of exhaustion on short euro/dollar positions."
By 0900 GMT, the single currency was unchanged from late Friday's levels at $1.2495 after hitting a session high around $1.2540 earlier in the day. It touched a four-week low of $1.2370 on Friday but held above the low for the year around $1.2330. Against the yen, the euro was at 136.56 yen , up 0.30 percent on the day. The dollar was slightly higher at 109.20 yen , compared with around 109.10 yen in late U.S. trade on Friday, but off its three-month high around 109.85 yen hit last week. The survey of manufacturing activity in the euro zone showed the main index at 52.5 in February, unchanged from January and in line with forecasts. While manufacturers reported steady business growth in the month, the strength of the euro was restraining the pace of the upturn and NTC, the research group which compiles the index, said it could be an early warning signal for the region.
ECB IN FOCUS
On Friday, the euro was helped by a report from a prominent research firm, Medley Global Advisors, that discounted the possibility of the ECB cutting interest rates at its meeting on Thursday. But the euro could come under pressure if speculation for an ECB rate cut lingers after the meeting, depending on what ECB President Jean-Claude Trichet says at the news conference that follows. "The market now thinks the ECB won't cut rates this time," said Shogo Nagaya, forex manager at Nomura Trust and Banking Corp. "But speculation for an easing could remain." Traders think the dollar may be at a crucial stage after its four-percent rebound from record lows against the euro in the past two weeks. Its failure to extend gains could be seen as the return to its two-year downtrend. "It's really difficult to tell what the trend is," said a trader at a U.S. bank in Tokyo. Friday's payrolls data are viewed as crucial for the dollar as an improvement in the jobs market could hasten a possible tightening by the Federal Reserve. That would be beneficial for the greenback, given that the currency's low interest rates have been hampering global investors' buying of the dollar. Later on Monday, the market will look to the U.S. Institute for Supply Management's February manufacturing index, due at 1500 GMT. The index is expected to fall to 62.0 from 63.6 in January due to a lack of new orders and ongoing weakness in the jobs market, according to a survey of economists. The gauge's widely watched employment component may tick up in February but not by much, the poll consensus showed.//