The euro has strengthened despite expectations of a sell-off after US unemployment data came in a little weaker than expected.
The euro closed at $0.8990 from $0.8875 a day earlier. Contrary to expectations, the US unemployment rate rose in August as businesses took on fewer workers than expected, partly because of a telecommunications strike.
The unemployment rate rose to 4.1 per cent in August from 4 per cent in July. Other reports showed that manufacturing slowed last month and spending on construction declined for a fourth straight month.
According to Dr Dan McLaughlin, chief economist at ABN Amro, the figures could signal a turning point for the US economy and may mean another rate rise is unlikely in the short term.
The National Association of Purchasing Management in the US said its monthly factory index fell last month to 49.5 from 51.8 in July. The below-50 reading suggests a contraction since January 1999. August's reading was the lowest since a 46.3 in December 1998.
Workers' average hourly earnings rose 0.3 per cent, or four cents, in August following an 0.4 per cent increase in July. At that rate, businesses should be able to absorb labour costs and hold the line on prices.
The Federal Reserve watches the monthly employment numbers to gauge whether demand for workers will trigger inflation. Labour accounts for about two-thirds of the cost of doing business, and higher wages could ultimately be reflected in the prices consumers pay for goods and services.
The Federal Reserve has raised interest rates to a high of 6.5 per cent in six moves since June 1999. It held rates unchanged last month, and its next policy-setting meeting is October 3rd. Most analysts, however, say it will have to wait until after the presidential election in November before making any changes and even then there is no guarantee that rates will rise again.
In contrast, both the European Central Bank and the Bank of Japan raised their interest rates a quarter-point last month, to 4.50 per cent in the euro zone and 0.25 per cent for Japan.
The ECB move narrowed the gap between US and euro zone benchmark rates to two percentage points. But then the euro fell to an all-time low on concern the euro zone economy was not strong enough to support higher borrowing costs.
The ECB cited the euro's decline and higher oil costs as the main cause of higher prices. Policy-makers are on "alert" for any acceleration in inflation, the ECB said, indicating that rates may rise further.
There is still no guarantee that the euro is set to recover. Dr McLaughlin says it is too early to tell and that it is possible the
UK and US economies have peaked. If that is the case, the argument for holding euros will strengthen. The Danish referendum on September 28th is also potentially negative for the euro and many traders may be unwilling to buy euros ahead of that.
Earlier yesterday Mr Jean-Claude Trichet, the governor of the French central bank and a member of the ECB's governing council, said in an interview on TV station La Chaine Info that the euro's current value does not reflect economic fundamentals and the currency should soon recover.
"In the foreign exchange markets we have a situation where the euro is flagrantly undervalued," he said. "The euro is set for a very substantial correction in the near term."
But for Europe, there is another problem. Euro-zone manufacturers scaled back production in June for the first time this year, a sign that higher interest rates may be restraining the region's economic expansion.
