NEWS / Foreign Exchange

FOREX-Dollar cuts gains on ECB warning, soft ISM data

FOREX-Dollar cuts gains on ECB warning, soft ISM data
Thu Jun 1, 2006 2:55 PM ET

(Recasts, updates prices, adds quotes)

By David McMahon

NEW YORK, June 1 - The dollar was little changed against the euro and yen on Thursday, erasing earlier gains after a soft U.S. manufacturing survey and a warning from the European Central Bank that global imbalances could hurt the U.S. currency.

The dollar quickly pared its gains after the ECB said in its twice-yearly Financial Stability review that any unravelingof global imbalances - code for the huge U.S. trade deficit and surpluses in Asian nations such as China -- could trigger "significant downward pressure" on the dollar.

While the ECB said the risk of such a scenario was small, its comments come amid rising speculation that global policy-makers are content to see a weaker dollar to help rectify trade imbalances.

The ECB's comments came just as data in the U.S. showed that factory activity rose at a surprisingly slow pace in May, with the Institute for Supply Management's manufacturing index logging its lowest reading since August 2005.

"You've got some weak U.S. data and the ECB coming out and saying the dollar might need to weaken further," said Michael Woolfolk, senior currency strategist at Bank of New York.

"We could see a further slide in the dollar heading into payrolls on Friday."

The Institute for Supply Management said its index of national factory activity fell in May to 54.4 from 57.3 the prior month, a bigger drop than analysts had expected. For details, see [ID:nN01334116]

After the weaker-than-expected data several banks and brokers, including Goldman Sachs, revised down their expectations for Friday's nonfarm payrolls report.

Midafternoon in New York, the euro was barely changed on the day at $1.2805, having fallen as low as $1.2722 earlier.

The dollar was also flat against the yen, trading at 112.65 yen . Earlier in the global session it had risen to just below 113.40 yen on follow-through buying prompted by fairly hawkish minutes from the Federal Reserve's last meeting that helped fuel speculation the Fed would raise rates again later this month.

Against the Swiss franc, the dollar was up slightly at 1.2200 francs . Sterling fell 0.2 percent to $1.8660 .

All eyes are now on the U.S. employment report for May, which will be released on Friday.

(Additional reporting by Gertrude Chavez-Dreyfuss