The euro headed up towards last week's seven-week high on the dollar as the greenback beat a broad retreat before U.S. data later in the day on nervousness over what the numbers would signal for U.S. rate hikes. European traders, back from a holiday weekend, turned their attention to the U.S. Institute of Supply Management's (ISM) May manufacturing survey at 1400 GMT to see whether this would indicate enough economic strength to warrant a June rate rise. A weekend attack in Saudi Arabia, which left 22 people dead, and oil's climb back above $40 a barrel remained drags on the dollar on worries that rising crude prices could stunt U.S. growth, set back rate rises and worsen the trade deficit. "A stronger ISM would have some positive impact on the dollar. A weaker ISM would have a bigger negative impact," said Aziz McMahon, currency strategist at ABN AMRO.
"We are in quite an uncertain environment particularly with quite a lot of good news in terms of U.S. interest rates already discounted and expectations are already pretty high for U.S. numbers." By 0946 GMT the euro had gained 0.6 percent on the day to $1.2260 , within half a cent of Friday's seven-week high. Manufacturing in the euro zone put on its strongest performance in more than three and half years as a recently weaker euro boosted exports and consumer demand improved in France. The PMI index gained to 54.7 in May from 54.0 in April and the euro inched up in its wake. The dollar eased slightly to 109.41 yen , having slid to its lowest since early May on Monday at just above 109.00 yen. The greenback also fell half a percent or more against the Swiss franc, New Zealand dollar and the Norwegian crown.
THAT TIME AGAIN
This week brings the U.S. employment report and monthly non-farm payrolls data on Friday, regarded by the market as a key gauge for the U.S. Federal Reserve as to whether the economy has picked up enough to warrant higher rates. The ISM survey is also an important economic gauge. Analysts expect its main index to fall to 62.0 from April's reading of 62.4. Interest rates of just 1.0 percent have contributed to dollar weakness over the past year by making it a cheap currency to fund lucrative trades into higher yielding units like sterling and the Australian dollar. "In the past few days, there has always been some movement on oil prices or terror attacks but you have to keep the focus a bit longer and think about rates," said Peter Fontaine, currency strategist at KBC in Brussels. "If there is data which brings doubts over a June rate hike, that a rate hike may be pushed backwards, that's more important at this stage."///