Euro drops as glum PMI readings stoke bets on more ECB easing By Reuters

By Sruthi Shankar and Vidya Ranganathan

LONDON/SINGAPORE (Reuters) – The euro fell against the dollar on Monday after business activity readings showed a bleak picture for the euro zone economy, boosting bets for more interest rate cuts by the European Central Bank this year.

The single currency fell 0.4 percent to $1.1122, recovering from a 0.7 percent loss earlier in the session, but still retreating from a 13-month high hit in late August, which was driven by bets on faster U.S. monetary policy easing.

A survey by S&P Global showed that business activity in the euro zone contracted unexpectedly this month as the region’s dominant services industry stabilized, while the slowdown in the manufacturing sector accelerated.

The recession appears to be broad-based, with the downturn deepening in Germany, while the French economy has returned to contraction after the boost it received in August thanks to the Olympics.

“The data certainly keeps the door open for a rate cut in October – it’s too early to say whether they will walk through that door but it’s a very bleak reading,” said Kenneth Brooks, head of corporate, FX and rates research at Societe Generale.

“The Fed has shifted from inflation to growth, and the ECB will, at some point, make the same shift as well.”

Traders now expect around 44 basis points of cuts this year from the ECB, compared with around 38 basis points last week, meaning they see a stronger chance of the central bank cutting rates again in October.

The dollar index, which measures the greenback against six major currencies, rose 0.1% to 100.92 – remaining above a one-year low hit last week.

In weekend news, House Republicans unveiled a three-month stopgap bill to avert a government shutdown.

UK PMI not too bad

Sterling was almost flat at $1.3314, erasing morning losses of around 0.5%, after a similar survey showed British companies reported a slowdown in growth this month, albeit less sharply than euro zone figures.

Sterling hit its highest level in more than two years against the dollar on Friday after strong UK retail sales data. The Bank of England left interest rates unchanged on Thursday, with its governor saying the central bank should be “careful not to cut too quickly or too much”.

Among other currencies, the Swiss franc was little changed at 0.8497 against the dollar, and the Swedish krona fell 0.3 percent to 10.22 crowns ahead of widely expected interest rate cuts from the Swiss National Bank and the Riksbank later in the week.

The dollar fell against the yen, albeit in thin trade due to a holiday in Japan. The dollar hit a two-week high of 144.50 yen last week after the Bank of Japan left interest rates unchanged and signaled it was in no rush to raise them again.

The decision, which came just days after the central bank cut interest rates by 50 basis points, halted the yen’s sharp gains this month. The currency had risen about 1.5% in September.

For the yen, a ruling party vote later this week to choose a new prime minister makes the Bank of Japan’s job tough in the coming months. A snap election is likely in late October.

The Liberal Democratic Party’s front-runners to succeed outgoing Prime Minister Fumio Kishida have offered differing views on monetary policy.

Sanae Takaichi, who is seeking to become the country’s first female prime minister, has accused the Bank of Japan of raising interest rates too early. Shigeru Ishiba has said the central bank is “on the right policy track,” while Shinjiro Koizumi, son of former prime minister Junichiro Koizumi, has so far said he will respect the BOJ’s independence.

U.S. stock futures rose 0.5 percent to $63,507. They had risen 2.4 percent to a one-month high of $64,730 earlier in the session.

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