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FOREX-Euro gains on factory data but ECB policy meeting looms

Monday, 4 Nov 2013 | 3:34 PM ET

* Euro touches lowest since Sept. 18, then recovers

* Speculation remains that ECB may loosen policy as early as this week

* Australian dollar rises on stronger retail sales

NEW YORK, Nov 4 (Reuters) - The euro climbed from a near seven-week low against the dollar on Monday after data showed manufacturing in the euro zone accelerated last month, but gains were capped by speculation the European Central Bank may soon cut interest rates.

Traders said the euro could stay under pressure before the ECB's policy meeting on Thursday. Plunging inflation in the region has led a growing number of banks, including UBS and RBS, to forecast a cut in the refinancing rate as soon as this week.

"European manufacturing PMIs show marginal improvement but (the data) doesn't alleviate concerns of a dovish ECB later in the week," said Scott Smith, market analyst at Cambridge Mercantile Group in Calgary, Alberta.

The euro gained 0.2 percent to $1.3516 after a survey showed the manufacturing Purchasing Managers' Index rose to 51.3 from September's 51.1, in line with an earlier flash reading and with the consensus forecast of economists.

Earlier, the euro fell to $1.3441, according to Reuters data, its lowest since Sept. 18 and well below a nearly two-year high of $1.3832 struck on Oct. 25.

The drop in the euro, which shed more than 2 percent last week, triggered a rush to hedge against further weakness. One-month euro/dollar implied volatility, a gauge of how choppy a currency is expected to be, jumped.

Credit Agricole said the ECB is unlikely to cut the refinance rate this week, but given the downside risks to inflation from a stronger currency, ECB chief Mario Draghi may flag a cut in the deposit rate, which would be negative for the euro.

A cut in the deposit rate, at which banks park excess cash with the ECB, to negative territory would make holding the euro expensive and force investors to sell it. It would also make the euro a funding currency for carry trades, in which investors borrow in a cheap currency to buy a higher-yielding one.

Analysts said market moves could be muted given the ECB meeting on Thursday will followed by U.S. nonfarm payrolls data for October on Friday.

"The end of the week will be more important than the beginning," said Christopher Vecchio, currency analyst at FXCM-owned DailyFX.com in New York. "These events could prove pivotal."

The euro's bounce on Monday nudged the dollar index down from a near seven-week high of 80.930 hit in Asia, the strongest since mid-September. It last stood at 80.547, down 0.2 percent on the day.

The dollar had risen in Asia after Dallas Federal Reserve Bank President Richard Fisher told a conference of business economists in Sydney he was concerned that corporate credit spreads have narrowed too much. He also said he does not see the Fed's balance sheet rising to $6 trillion or more.

Against the yen, the dollar was last down 0.1 percent against at 98.57 yen.

Data on Monday showed orders for a wide range of U.S.-made capital goods sank more than estimated in September, a sign companies cut their investment plans sharply as Washington hurtled to the brink of default. But other data suggested factory activity accelerated in October.

The Australian dollar edged higher, supported by stronger-than-expected retail sales. It rose 0.7 percent to $0.9505.