Euro up on German PMI, outlook still clouded

LONDON: The euro rose on Tuesday after better-than-expected manufacturing data temporarily alleviated concerns about a contraction in Germany, although gains looked limited as it did little to alter the overall gloomy picture for global growth.

Commodity currencies also climbed on improved investor appetite for risk after Chinese Purchasing Managers' Index data turned out to be not as bad as some in the market had feared.

The single currency was last up 0.8 percent at $1.4471 after the German data sparked a rally that was fuelled by real money accounts buying euros, traders said.

Traders cited support from buying orders in the $1.4340-45 area. There was talk of good bids at $1.4260 to $1.4270, right around support at last Friday's intraday low near $1.4259.

A flash manufacturing activity PMI index for Germany, the euro zone's largest economy, stayed at 52.0 in August, unchanged from the previous month and reassured some investors who were concerned there could be a fall to below 50.

A fall below 50 would mean activity was contracting and highlight concerns about a sharp slowdown in the euro zone, just as US Mid-western activity data last week triggered worries about a recession in the United States and led to risk aversion.

The euro zone flash PMI showed the region's dominant service sector saw its weakest growth in two years while factories saw activity decrease.

"This data is not as dire as had been anticipated and not as weak as we have seen in the United States but clearly global growth is still in decline," said Steven Saywell, head of FX strategy at BNP Paribas.

The PMIs are seen as a key gauge of whether the euro zone's deepening sovereign debt crisis, which is recent weeks has spread from the periphery to the core economies of Italy and Spain, is weighing on broader economic growth.

German ZEW investor sentiment indicator data due at 0900 GMT will provide another measure of how well the euro zone's powerhouse economy is weathering the crisis. Analysts expect sentiment to deteriorate and any downside surprise could see the euro come under fresh pressure.

Public squabbling between the bloc's member states on how to tackle the debt problems is also not helping the euro.

In Asian trade, HSBC's China flash PMI, which was not as bad as some in the market had feared, boosted higher risk commodity currencies such as the Australian and New Zealand dollars.

"If Asia stays strong that will really help global markets," BNP Paribas's Saywell said.

The Australian dollar was last trading 1.1 percent higher at US$1.0510 , while the New Zealand dollar rose 1.2 percent to US$0.8332.

WARY OF INTERVENTION

The euro rose 0.5 percent versus the safe-haven Swiss franc to 1.1405 francs , with market players still cautious of further official action from the Swiss National Bank to curb the franc's strength.

The dollar dipped 0.2 percent against the yen to 76.64 yen , although market players remained wary of yen-selling intervention by Japanese authorities, in the wake of the dollar's drop to a record low around 75.94 yen late last week.

Bank of Japan money market data suggests Japan sold roughly 4.5 trillion yen in currency intervention on Aug. 4, its biggest one-day yen-selling intervention ever.

But the yen ended up rising back to levels seen before intervention a few days later.

Todd Elmer, currency strategist at Citi in Singapore, said intervention might prove more effective if Japan were to shift toward repeated small-scale intervention, but added that such a switch in tactics was unlikely.

"If they were to engage in repeated interventions, they would likely face very stiff criticism from international policymakers," Elmer said.

Copyright Reuters, 2011