The euro struggled to keep above the previous week's four-week lows on the dollar on Monday as markets remained jittery about the prospects of an European Central Bank (ECB) rate cut in the future. The ECB is not expected to cut rates at its monetary policy meeting on Thursday, but investors will scrutinise comments by central bank president Jean-Claude Trichet following the bank's meeting for hints about future policy. However, euro bulls were 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 euro will be in a range until the ECB meeting," said Michael Metcalfe, currency strategist at State Street in London. "It is pretty clear that rate expectations were driving the euro last week and I suspect it will not move decisively until the threat of that meeting is passed. There is quite a remote chance that the ECB would cut." By 1115 GMT, the single currency was slightly down from late Friday's levels at $1.2470 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 136.12 yen , steady 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.
PIVOTAL POINT
The euro was not moved by the survey of manufacturing activity in the euro zone, which 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. But analysts said the manufacturing numbers were not likely to affect the ECB's rate policy just yet. "We see Europe rebounding so we do not expect a rate cut now," said Benedikt Germanier, foreign exchange strategist at UBS in Zurich. 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 rates at its meeting on Thursday. Howver, domestic pressure continued on the ECB for a rate cut, with the head of the German BDA employers' federation Dieter Hundt saying that, given the strength of the euro, lower borrowing costs would be justified. 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. Failure to extend gains could be seen as the return to its two-year downtrend. Friday's non-farm payrolls data from the United States are viewed as potentially pivotal for the dollar as an improvement in the jobs market could hasten a possible tightening by the Federal Reserve. "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."
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.//