The dollar recovered from a two-month low on the euro and a one-week low on the yen on Friday, looking for upbeat U.S. manufacturing data later but wary of any currency fireworks from a Group of Seven meeting. Sterling, meanwhile, came under fire, dropping one percent on the dollar and hitting an eight-month low on the euro after weaker than expected manufacturing data threw a further dampener on expectations for higher UK interest rates. Soaring oil prices are expected to form the central focus of the Washington meeting of finance ministers from the world's top economic powers but the market was edgy just in case they also sprung a surprise and called for greater dollar depreciation. "The G7 event risk is looming and the market is a little cautious about playing the longer side of the dollar until it passes - even though it seems they have aired a lot of what they are going to say," said Paul Mackel, currency strategist at ABN Amro in London. "If we get a strong ISM (manufacturing) figure later, the dollar might rally a bit but it might not show up until next week when we've got this G7 over and done with." By 1206 GMT, the dollar was 0.2 percent up from late New York levels and was trading at $1.2405 per euro after shedding nearly one percent on Thursday to $1.2444, its lowest since mid-July. The euro gained 0.7 percent on the British pound, climbing above 69.00 pence for the first time since late January. News UK Prime Minister Tony Blair had undergone heart treatment also reignited debate about his succession, compounding pressure from the weak data.
G7 TALKING
No shift in stance on currencies is expected but, after the G7 upset the dollar a year ago with a call for greater currency flexibility, the market is wary of any further pressure on Asian nations to allow their currencies to appreciate to help correct the U.S. current account deficit. "It will certainly temper enthusiasm for buying the dollar aggressively," said Daragh Maher, senior currency strategist at Calyon in London. China repeated it would move towards a flexible foreign exchange rate but offered no new specifics on timing in a joint statement with U.S. officials on Friday. The chief U.S. economic focus was the Institute for Supply Management's index of manufacturing activity due at 1400 GMT. forecasts showed analysts expected the main index to dip to 58.0 in September from 59.0 in August but after an unexpected improvement in a survey of Chicago-area purchasing managers on Thursday, analysts said the risk was for a stronger rather than a weaker number. "We expect quite good U.S. data today but the market has been shrugging off good data recently," said Peter Fontaine, currency strategist at KBC in Brussels.
The University of Michigan's U.S. consumer confidence is due beforehand at 1345 GMT and forecast to show a slight rise to 96.0 in September from 95.9 in August. In the euro zone, an index of manufacturing activity fell to its lowest in seven months. The Reuters purchasing managers index dropped to 53.1 in September from 53.9 in August. The euro dipped slightly on the news but remained around the $1.24 area, with some in the market eyeing the previous day's two-month high and questioning whether it could vault a July peak around $1.2460 and break a range trapping it for the past six months.
SHORTLIVED EFFECT
The dollar clawed back some of its recent losses on the yen to gain 0.4 percent on the day to 110.40 yen , having dipped to around 109.80 in Asian trade when the yen rallied briefly on an upbeat "tankan" survey of business sentiment. The key diffusion index of the closely watched Bank of Japan survey came in at plus 26, higher than market forecasts for a reading of plus 23. The number was the strongest since May 1991. Traders pointed out the survey showed sentiment was expected to slip to plus 21 in December, which added to market concerns about the pace of the Japanese economic recovery.///