Euro under extreme pressure; seen at 1.34 against US dollar

LONDON: The euro climbed from an eight-month low on Thursday after German and French business activity beat expectations, although fears that possible tougher sanctions on Russia would hurt the euro zone were seen limiting gains.

The French composite purchasing managers index of both the manufacturing and services sector rose to 49.4 from 48.1 in June, bringing activity closer to the 50-point line dividing growth from contraction.

German business activity also expanded in July as the services sector grew at the fastest rate in three years. But concerns that economic activity in Germany, which has strong trade links with Russia, could stumble in coming months as sanctions begin to bite were keeping many away from the euro.

The sanctions are likely to weigh on a fragile recovery and keep alive expectations of looser monetary policy from the European Central Bank. Euro zone interest rates were slashed in June and the ECB has left open the possibility of further monetary loosening - possibly through quantitative easing.

The euro hit a day's high of $1.3476 after the German data was released from $1.3450 beforehand. It had fallen to an eight-month low of $1.3438 in early London trade. The euro was also slightly higher against the yen at 136.62 yen and rose against the pound to 79.075 pence, having slumped to a 23-month low on Wednesday.

"The activity data offsets some of the weakness we saw last month and that has helped the euro," said Geoff Yu, currency strategist at UBS. "But there are concerns about domestic growth in the euro zone and possible sanctions on Russia are likely to have an impact."

The euro has also struggled to find support amid persistent expectations for further monetary easing in the euro zone and a gradual widening of interest rates favouring the US over Europe.

KIWI SLUMPS

The biggest mover though was the New Zealand dollar . It skidded to a six-week low after the country's central bank switched to a wait-and-see stance following its fourth straight rate hike and Governor Graeme Wheeler warned against a strong currency.

The kiwi fell 1.3 per cent to $0.8568, a level not seen since June 12.

The Reserve Bank of New Zealand (RBNZ) raised its cash rate by 25 basis points to 3.5 per cent early on Thursday but pushed the pause button, saying the economy appeared to be responding to higher rates as intended.

The move was not a complete surprise given many have been questioning the need for more tightening in the face of a high currency, restrained inflation and falling prices for dairy, the country's biggest export earner.

Yet the reaction in the kiwi was swift with investors knocking the currency down sharply.

"Perhaps the main surprise was the language regarding the high exchange rate. 'There is potential for a significant fall' opens to interpretation as a veiled intervention threat," said Imre Speizer, senior strategist at Westpac in Auckland.

Analysts at Citi said it is unusual for a central banker to make such blunt comments about the currency and showed a high level of frustration with the strong kiwi.

Following is a selection of comments from analysts on important technical developments in the foreign exchange market.

EURO/DOLLAR: "The euro continues to look weak pushing below the $1.3500 level and breaking below the lows this year at $1.3477. This failing momentum suggests we could well see a slow drift lower towards $1.3300, and the November lows. A move back through $1.3570 is required for a retest of $1.3640."

DOLLAR/YEN: "The pressure appears to be building up on the downside and a move towards 100.60 yen while below the 101.80 level. It would take a move through 101.80 to target the range highs just below 103.00."

EURO/STERLING: "A marginal new low at 78.74 pence yesterday the euro has rebounded a little. The pressure remains for a move towards 77.80, with any rebound needing to overcome the 79.60 level to stabilise in the short term."

STERLING/DOLLAR: "We've seen the pound continue to drift lower as it heads towards trend line support from the $1.4800 lows last year, which currently comes in at $1.6995. Below that we also have support at $1.6925. In the near term we need a move through $1.7200 to argue for further gains towards $1.7330. $1.7330 is the 50% retracement of the decline from the 2007 highs at $2.1160 and the lows at $1.3500 in 2009."

(With inputs from Reuters)