Wednesday, July 02, 2008

Euro comes off highs against dollar on caution ahead of U.S. jobs data

The euro came off highs against the dollar on profit-taking ahead of key jobs data out of the U.S. and Thursday's interest rate decision by the European Central Bank. The euro began the day on a firm note, buoyed by hopes of a euro zone rate hike Thursday, but has since edged back down after failing to break through the key $1.5850 mark.

Attention has turned to the release of ADP jobs data out of the U.S., which should give a hint on how the closely-watched official non-farm payroll numbers will look when they are released Thursday. A better-than-expected ISM survey on U.S. manufacturing activity Tuesday provided some optimism that the U.S. economy may be over the worst. Many remain sceptical, however, and any gains are proving to be shortlived.

"The dollar's failure to rally despite the firm headline ISM number shows investors are highly sceptical of the U.S.' near-term economic prospects," said Geoffrey Yu at UBS. The euro/dollar rate is likely to remain confined to tight ranges as market players stay sidelined ahead of what is largely expected to be a quarter point interest rate rise from the ECB Thursday.

With the euro zone economy showing signs of faltering, however, the key focus will be on the accompanying press conference for any signals on whether the central bank will be in a position to deliver any more rate rises.

Euro zone PPI data earlier Wednesday nevertheless continued to suggest that the ECB's worries over rising inflationary pressures have far from gone away. The figures showed producer prices in the region rose by 1.2 percent in May from April and by 7.1 percent from a year earlier, way above forecasts for more moderate gains of 0.7 and 6.6 percent respectively.

Elsewhere, the pound remained weak, with the euro earlier hitting a 23-day high against the UK currency of 0.7968, as UK data pointed to a very bleak outlook for the UK housing and construction sectors.

The latest UK construction PMI slumped to 38.8 in June from 43.9 in May, showing activity in the sector declining at the fastest pace since the series began in 1997. At the same time, housing equity withdrawal slumped to its lowest level since the first quarter of 2001, according to figures released by the Bank of England.

The news comes amid major concerns about the outlook for the housebuilding sector, as shares in Taylor Wimpey Plc lost nearly half their value after it announced it had failed to raise equity and will cut 900 jobs, as conditions in the housebuilding market continue to deteriorate.

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