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The dollar pared losses on Monday after stronger-than-expected data on US manufacturing and options-related trading partially offset central bank demand for euros in quiet trading. Following a recent pattern, the dollar slipped after the Institute for Supply Management's manufacturing report, with underlying demand for euros from central banks and position adjustments in a relatively thin summer market pushing it still lower.
The ISM index rose to 56.6 in July, the highest this year, from 53.8 in June and above economists' forecast rise to 54.5.
"It's a continuation from the end of last week where we have strong US data, yet the dollar sells off," said Michael Woolfolk, senior currency strategist with the Bank of New York. "Currencies appear to be technically driven."
But a wave of options-related euro selling after a barrier was taken out at $1.2250 prompted a mini-revival for the dollar, although it was still weaker across the board against major currencies.
By late afternoon the euro was up 0.5 percent at $1.2185. It had traded as high as $1.2252, according to electronic trading platform EBS.
"The minute we hit it ($1.2250), that was it, and we went right back below $1.2200 again," said Grant Wilson, senior dealer at Mellon Bank in Pittsburgh.
Aziz McMahon, currency strategist at ABN Amro in New York, said underlying demand for euros from central banks could be weighing on the dollar.
"I think it's probably just a case of structural factors weighing on the dollar again," he said. "There may be a return of some central bank buying (of euros) that is preventing the dollar from rallying on good data."
The currency has been locked in a broad range between a 14-month low near $1.1870 hit in early July and a peak last month close to $1.2260.
Illiquid markets, holiday-dominated trading and a reluctance to take on big positions are driving currencies as much as underlying economic fundamentals, dealers say.
The dollar was down 0.8 percent at 1.2784 Swiss francs and off 0.3 percent against the yen at 112.23. Sterling was up 0.7 percent at $1.7684.
The Russian central bank said on Monday it had increased the euro share of its target currency basket and had reduced its dollar share.
Traders have frequently cited Russia as a buyer of euros in recent weeks and months.
Currencies reacted little to the death of Saudi Arabia's King Fahd. Oil prices rose to a record $62.30 a barrel before closing at $61.60 even though a Saudi source said the country's oil policy would not change.
A spate of refinery outages and tensions over Iran's nuclear ambitions also rattled oil markets.
The euro got a lift early in the global session from a stronger-than-expected increase in the euro zone manufacturing purchasing managers index. The euro zone PMI rose to 50.8 in July from 49.9 in June, above the 50.0 forecast by economists.
Currency analysts at J.P. Morgan said the uptick in euro zone bond yields in light of improving data like Monday's PMI might be giving some support to the euro.
Their counterparts at HSBC noted that US bond yields remain high but are not giving the dollar much support.
The yield on the 10-year Treasury note rose to 4.32 percent, its highest since April.

Copyright Reuters, 2005

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