June 2, 2008 / 9:10 AM / 12 years ago

FOREX-Sterling falls on B&B, euro slips on PMI

(Changes dateline, byline, adds comment, updates prices)

By Naomi Tajitsu

LONDON, June 2 (Reuters) - Sterling fell one percent versus the dollar on Monday on news of problems at the UK’s largest buy-to-let mortgage lender, while the euro slipped as euro zone manufacturing activity hit its lowest in nearly three years.

U.S. private equity firm TPG Capital has agreed to take a 23 percent stake in Bradford & Bingley BB.L, the struggling lender said on Monday, after reporting a loss for the first quarter and announcing its CEO is resigning [nL02347871].

The Purchasing managers’ index of manufacturing activity in the euro zone in May slipped to its lowest since August 2005, while activity in Italy and Switzerland also fell, underlining sputtering growth in the euro zone even as inflation surges.

The NTC Research Purchasing Managers’ Index final reading for euro zone manufacturing came in at 50.6 in May, down from 50.7 in April and more or less in line with expectations for 50.5 [nL27558837].

“The aggregate manufacturing number is precariously close to the level that indicates contracting output,” said Adam Cole, head of currency strategy at RBC, adding that more signs of economic weakness could sting the single European currency.

The weak PMI figures follow data late last week showing inflation pressures in the euro zone remain at a record high, a dangerous combination that could further compromise the overall economy.

Despite signs of economic weakness, the European Central Bank has stuck to its position of ensuring inflation does not get out of hand, which suggests it will be wary of cutting interest rates to help spur growth.

ECB President Jean-Claude Trichet reinforced this view after he told French online information site Mediapart in an interview published on Sunday that governments should not be complacent about high inflation and market corrections [ID:nL01176973].

The ECB is one of a slew of central banks that will hold meetings on interest rates this week, although few in the market expect that changes to borrowing costs will result from any of them.

The euro traded 0.2 percent lower at $1.5525 EUR=, having struck a two-week low of $1.5460 on Friday.

The dollar was supported against the euro, having rebounded on the prospect the Federal Reserve may eventually start lifting rates to deal with soaring prices due to a spike up in energy costs.

The euro has retreated from a record high of $1.6018 hit in April, according to Reuters data, as rate speculation has helped the U.S. currency score back-to-back monthly gains against the single currency in April and May for the first time since early 2007.

Sterling fell 1 percent to $1.9617 after the B&B news plus poor mortgage lending and manufacturing PMI data.

RATE DECISIONS

The dollar slipped 0.6 percent to 104.80 yen JPY=, but stayed in range of a three-month high of 105.87 yen touched last week as the U.S. currency remains bolstered by the view that the Fed is approaching the end of its aggressive monetary loosening cycle.

Analysts said the dollar could extend its recovery against the yen if the U.S. economic reports support views that the Fed may start raising rates later this year from 2 percent to contain quickening inflation pressures.

The European Central Bank remains adamant it will focus on prices when conducting monetary policy, suggesting it will be hesitant to cut interest rates even as inflation weighs on economic growth.

Ahead of the ECB’s decision on rates on Thursday, the Reserve Bank of Australia will decide on policy on Tuesday, while the Bank of England and the Reserve Bank of New Zealand will also announce policy decisions later in the week.

Investors will look to the Institute for Supply Management’s manufacturing index later in the day for a snapshot of the U.S. factory sector. The ISM index is expected to be 48.5 in May, little changed from 48.6 in the previous month and showing mild contraction in manufacturing. [ID:nN30302125]

Editing by Chris Pizzey

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