LONDON: The euro rose against the dollar on Monday as data showed euro zone showed business activity picking up while uncertainty over the Federal Reserve's stimulus kept investors wary of the U.S. currency.
The euro rose to $1.38 after a report on Monday showed German manufacturing activity and the Flash Eurozone Composite Purchasing Managers' Index (PMI) both beat forecasts in December.
The single currency had earlier dipped to around $1.3745 after separate data showed French private-sector activity unexpectedly slowed.
"Admittedly the French numbers were weak, but both the German manufacturing PMI and the composite euro zone numbers were better than expected and that is a relief for the euro," said Jane Foley, senior currency strategist at Rabobank. "They could have been a lot worse."
The data was not good enough to push the euro to the two-year high around $1.3833 it reached in October, and Foley said a lot would depend on what the Federal Reserve does this week.
The odds are the Fed's rate-setting committee will make no major policy change when it meets on Tuesday and Wednesday. But most recent U.S. data suggest the Fed will begin to wind down its bond-buying programme sooner rather than later.
However, U.S. Treasury bond yields eased on Monday, dragging the dollar index down 0.35 percent to 79.936
"If the Fed refrains from tapering we could see some pressure on the dollar," said Alvin Tan, currency strategist at Societe Generale.
Highlighting nervousness in the market, euro/dollar one-month implied volatility, a gauge of how choppy a currency pair is likely to be, rose to its highest in five weeks at 7.11 percent.
The euro has risen in recent weeks, tracking higher euro zone money-market rates. As euro zone banks repay cheap loans to the European Central Bank, the ECB's balance sheet should shrink, putting further upward pressure on rates. In contrast, the Fed, for now, and the Bank of Japan are printing vast sums, weakening the dollar and the yen.
YEN RECOVERS
The yen rose as investors bought the safe-haven currency after tepid Chinese manufacturing data fuelled concern about recovery in the world's second-largest economy. An uptick in Japanese business sentiment supported the yen at the margins, but most analysts said the gains would probably not last.
"The central bank is printing money and the majority of analysts even expect it to increase the volume of bond purchases in 2014," Lutz Karpowitz, currency strategist at Commerzbank wrote. "The yen has everything required to come under further pressure, and Tokyo also welcomes a weak yen."
The dollar was down 0.2 percent at 103.04 yen. The euro was flat at 142 yen, off a five-year high of 142.82 yen hit last week.
Data from a U.S. financial watchdog showed speculators' net yen short positions were near six-year highs last week.
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