The dollar hovered near a two-month low versus the euro on Monday, weighed by expectations that this week's US data will bolster the case for rate cuts, while a slight unwinding of carry trades lifted the yen.
The greenback was also hurt by a rise in oil prices as international tension mounted over Iran's nuclear programme, while the euro was supported by weekend comments from European Central Bank President Jean-Claude Trichet, which were seen backing expectations for euro zone rates to rise further. Trichet attends the Eurogroup meeting of eurozone finance ministers from 1400 GMT on Monday.
In the United States, analysts said a slowdown in economic growth could well prompt the Federal Reserve to cut rates from 5.25 percent. US preliminary Q4 GDP data is due on Wednesday, and the Institute for Supply Management's manufacturing index on Thursday. "Our inclination is that this week could be a rough one for the dollar ... The Fed sounded dovish and if this is backed up by the hard data then I think the markets will sit up and take notice," Lehman Brothers FX strategist Phyllis Papadavid said.
The dollar was also pressured by the rise in oil prices - which, if sustained, could hurt growth and push up inflation in the United States, the world's biggest energy consumer. Oil prices rose for a fourth day, nearing a fresh 2007 high above $61 a barrel as Western powers met in London to discuss tightening UN sanctions on Iran, the world's fourth largest oil exporter. The move follows Tehran's refusal to heed a UN deadline for halting uranium enrichment.
By 1245 GMT, the euro was steady at $1.3160, off an earlier two-month high of $1.3198. The dollar was down 0.3 percent at 120.60 yen, while the euro was buying 158.72 yen, down almost 0.4 percent on the day and some way off Friday's record above 159.60.
Traders said the yen's rise was the result of a slight unwinding of carry trades, where low-yielding currencies are used to fund purchases of higher return assets, but analysts said the move could be short-lived.
"It is too early to get enthusiastic about the upside potential for the yen ... as actual chart damage at present is minimal," Barclays Capital technical strategist Phil Roberts said in a note to clients. In an interview with Germany's Focus magazine published over the weekend, the ECB's Trichet stressed the importance of wage restraint as pay talks go on in Germany.
The comments backed expectations for eurozone borrowing costs to rise to 3.75 percent next week and then 4 percent later in the year. "That goes along the lines of the comments we have had from the ECB, still warning about inflation, and supporting expectations for a rate hike in the euro area next week," Niels Christensen, FX strategist at Nordea in Copenhagen, said.
The New Zealand dollar hit a two-month high of US $0.7095 after data showing business confidence rose to a two-year high in February. Above US $0.7097 would be a 14-month peak.
"The reading is consistent with growth of around 2.5 percent and is bound to make the market a bit more confident that rates will rise at the next meeting on March 8," Bear Stearns said in a research note. At 7.25 percent, New Zealand's interest rates are already the highest among industrialised countries, making it a favourite play in carry trades. No major eurozone or US data is due on Monday.
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