The euro has fallen slightly but is holding well above previous lows as speculators fear the central banks could intervene again, catching them offside. The currency suffered slightly on further evidence that the European economy may be at or near its peak.
The euro-area manufacturing Purchasing Managers' Index was weaker than expected, falling to 57.2 in September from 58.6 in August, continuing its steady downtrend from the April peak. However, according to Mr Jose Luiz Alzola, economist at Schroder Salomon Smith Barney, disruptions in several countries created by protests against high oil prices may have hurt activity readings last month. The breakdown by countries shows the same pattern of moderating, but strong, growth, and increasing prices pressures happened in all countries.
At the same time, Finnish consumer confidence fell to its lowest level since 1996 suggesting that the ECB may not raise interest rates much further.
The euro closed at $0.8795, down slightly from $0.8838 on Friday as traders kept an eye on possible further intervention.
The markets believe there is an even chance that rates will rise again when the ECB meets on Thursday. But this is unlikely, according to Mr Jim Power, chief economist at Bank of Ireland, and Mr Austin Hughes, chief economist at Irish Intercontinental Bank. Mr Power says the bank is more likely to wait until October 19th but Mr Hughes says that meeting is being held in Paris and the ECB may prefer to wait until the following meeting on November 4th. That would limit the scope for a further rate rise before the end of the year.
He added, however, that there was a possibility the ECB might be keen to follow up its recent intervention with a rate rise as such action is a usual response. But he said this could cause problems as the markets would then link interest rates directly with the state of the currency.
Data released yesterday also showed US manufacturing contracted in September for the second consecutive month, brought down by the biggest drop in new orders in almost two years. Higher prices for raw materials affected more companies than a month earlier.
The National Association of Purchasing Management's index was little changed at 49.9 in September, compared with 49.5 in August. A reading below 50 signals a contraction, and the August decline was the first since January 1999. As a result, the Federal Reserve is likely to leave rates unchanged at its meeting this week as is the Bank of England's monetary policy committee.
