Euro-zone manufacturing industry slid closer to the brink of renewed recession in May, a leading business survey showed yesterday, raising pressure on the European Central Bank to cut interest rates at its next meeting.
The unexpectedly sharp drop in the Reuter/NTC Research purchasing managers' index for manufacturing, which hit its lowest level for 16 months, dashed lingering hopes of a recovery soon in the 12-nation bloc.
The new economic data and encouraging comments from EU officials and politicians, including the German chancellor, Mr Gerhard Schröder, raised expectations of a reduction in euro-zone interest rates later this week.
Mr Schröder said yesterday that European members of the G8 thought the ECB had leeway in its interest rate policy to stimulate euro-zone economic growth. The ECB is widely expected to reduce its benchmark interest rate of 2.50 per cent at its next meeting on Thursday.
A rate cut in the euro zone could also go some way to ease the value of the euro against the dollar, following its rapid appreciation in recent months.
In trading yesterday the US dollar failed to sustain early progress against the euro, after a conflicting picture of the US economy emerged from key data and investors digested world leaders' comments on the US currency.
The euro fell as low as $1.1655 in early trading yesterday, but the publication of mixed US data provided an excuse to start buying it back, lifting it to $1.1752, still a loss of 0.17 per cent on the day.
The economic data showed the US manufacturing sector slowed its rate of decline in May by more than economists had expected but US construction spending in April, which had been forecast to rise, instead fell.
The Institute for Supply Management reported its May index of manufacturing rebounded to 49.4 from 45.4 in April, still below the critical 50 level that separates growth from contraction for the third straight month.This was enough to encourage share buying on Wall Street, where the Dow Jones index of leading shares added xxxxxx
A separate study of US construction spending in April found that spending in the sector fell 0.3 per cent, confounding analysts estimates of a 0.1 per cent rise.
"The manufacturing data was not too bad, but the market already priced that into the dollar and that's why it's been pared back a bit," said Mr Russell LaScala, chief spot dealer at Deutsche Bank in New York. The dollar/euro rate will also be affected this week by expectations of an interest rate cut by the European Central Bank.
Meanwhile, investors returned to their trading desks from the weekend faced with a range of comments on the dollar by leaders of the world's richest nations while at the G8 summit.
US President Mr George W Bush told the G8 leaders meeting in Evian, France, he wanted a strong dollar. Italy's Prime Minister, Mr Silvio Berlusconi, said Mr Bush told the G8 leaders he wanted a strong dollar but had acknowledged the possibility of fluctuations on financial markets.
