The dollar headed towards last week's four-week high on the euro and gained versus the yen on Tuesday, buoyed by optimism that U.S. jobs data later this week may show sturdier improvement over past months' figures. Dollar bulls have taken heart about the U.S. labour market after the jobs component of a February U.S. manufacturing index released on Monday gave its highest reading since 1987. Later on Tuesday, a report on U.S. job cuts from outplacement firm Challenger, Gray & Christmas will garner market attention, with investors looking for additional signals of improvement in the labour market -- so far the weak link in U.S. recovery. "A lot of people have got optimistic, revising up their forecasts for Friday's non-farm payrolls on the back of yesterday's survey but it is a bit pre-emptive...there's no guarantee that the Friday number will be quite strong," said Ryan Shea, senior international economist at Bank One in London. By 1220 GMT the euro had slipped 0.5 percent on the day to $1.2385 , not far above Friday's four-week low of $1.2370. The dollar had gained 0.6 percent to 109.70 yen , not far below a 109.83 three-month high set last week. It was also 0.8 percent higher on the Swiss franc and 0.5 percent stronger on the day against the British pound. Federal Reserve Chairman Alan Greenspan talks about the current account at 1730 GMT and his comments will be closely watched for any clues to the timing of higher interest rates.
RATE DEBATE
Interest rate expectations in the euro zone and the United States are set to be a key determinant of euro/dollar direction this week. Jobs growth is a significant factor in the Fed's consideration about when to raise U.S. interest rates from one percent -- their lowest since 1958 and one reason why the dollar has been under continuous selling pressure for months. Dollar bulls hope a strong reading in Friday's payrolls data will give the U.S. currency a boost, helping it build up recent gains that took it up from record lows set at $1.2927 only two weeks ago. "Clearly the market is a little bit more upbeat about the dollar than it has been," said Mitul Kotecha, head of global foreign exchange research at Credit Agricole Indosuez in London. "Today's (Challenger) data may be secondary but it will be watched. If we see improvement in job cuts it will be a positive sign for payrolls."
FLIP SIDE
On the other side of the coin, recent business confidence and inflation data out of euro zone economies indicate euro strength is starting to weigh on the pace of economic recovery. The European Central Bank meets on Thursday. After speculation last week about a rate cut, the market does not now expect it to lower the cost of borrowing this week but there is jitteriness over potential surprises. Much attention will focus on ECB President Jean-Claude Trichet's regular news conference after the meeting for signs the bank may be considering lowering rates. "The economic case for a reduction is very strong but the ECB council members haven't given a hint of an interest rate cut being on the agenda so on that basis we're going for no change," Shea said. Unemployment in the euro zone held steady at 8.8 percent in January. Retail sales in the bloc's biggest economy, Germany, showed a rise of 3.1 percent on the month in January but fell by one percent on the year, while in France consumer confidence fell unexpectedly in February. In Japan, the Nikkei share average hit a 21-month high but it failed to boost the yen, with some market players suspecting the Japanese authorities may have been in the market. Japan has sold at least 10 trillion yen ($92 billion) this calendar year to prop up the U.S. currency and prevent yen strength from eroding its export-led recovery. The Bank of Canada is expected to cut its main rate to 2.25 percent from 2.5 percent on Tuesday. The greenback was firmer on the Canadian dollar at C$1.3400.///