May 2, 2012 / 10:49 AM / 5 years ago

Euro knocked by euro zone factory gloom

The Japanese Yen's exchange rate against U.S. dollar (C) which is displayed on an electronic board, is reflected on rain drops on the window of the board outside a brokerage in Tokyo May 2, 2012.Kim Kyung-Hoon

LONDON (Reuters) - The euro fell against the dollar on Wednesday after weak manufacturing data raised concerns about the euro zone economy and was vulnerable before elections in France and Greece which could dent austerity plans drawn up to beat the debt crisis.

The factory number contrasted with better U.S. manufacturing data and weighed heavily on the euro, particularly given that purchasing managers data were weak not just in indebted peripheral euro zone countries but in France and Germany too.

Italy's manufacturing sector shrank far more than expected, with new orders tumbling at their fastest rate in three years, while data out of Germany, Spain and France also revealed factory activity falling significantly.

The euro fell 0.75 percent to hit $1.3134, its lowest in more than a week. This took it well below a one-month peak of $1.3284 hit the previous day, although it stayed above chart support at the 100-day moving average around $1.3116.

"The PMI numbers were pretty dreadful ... There is clear pressure on euro/dollar now and it is looking likely to fall towards $1.31, the lower end of the recent range" said Jennifer Hau, currency strategist at Lloyds.

"There is no expected policy change from the ECB but the market will be looking at what Draghi says about the weaker numbers and about possible further steps it may take".

The ECB meets on Thursday In Spain, with pressure back on the bank to use its bond buying and other powers to shield weaker euro members from additional pain.

Further data showed euro zone unemployment rose to match its record high of 10.9 percent last seen 15 years ago, while the dollar was supported after U.S. figures on Tuesday showed the strongest factory growth in 10 months.

Also in focus on Wednesday will be U.S. private payrolls figures due at 1215 GMT, an indicator of the health of the jobs market before non-farm payrolls numbers are released on Friday.

But volumes were thin after the May Day holiday in Europe on Tuesday and traders said this could cause exaggerated moves.

"It is prudent to watch and wait at the moment. There is so much in the way of information and given the lack of liquidity with it being Golden Week in Japan and the May Day holiday yesterday it will take a while for the market to make an assessment," said Lauren Rosborough, senior currency strategist at Societe Generale.

RISKS AHEAD

With elections ahead, political uncertainty has the potential to push the euro below $1.30.

Francois Hollande, front-runner and first-round winner in the French presidential race, has promised to shift the debate in Europe towards promoting growth if he is elected, raising concern about tensions between Germany and France.

But others have played down such fears, saying Germany appears to be relaxing its focus on austerity.

The election in Greece is more unpredictable. The two main parties supporting the country's bailout scheme are thought to have only a wafer-thin lead to form a coalition over smaller parties opposed to the program.

Tuesday's better U.S. data also helped the dollar rise 0.25 percent against the yen to 80.28, taking it off a 2-1/2 month low of 79.640 yen hit on Tuesday.

Pressure on the yen increased after a Moody's ratings agency official said Japan's delay in implementing a sales tax increase could bring forward "the day of reckoning" in the Japanese government bond market.

The dollar index .DXY, a measure of the dollar against a basket of major currencies, rose 0.5 percent to 79.232.

Editing by Toby Chopra

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