Euro stuck near lows, hurt by ECB easing prospects and Ukraine

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The euro hit a year-low versus the dollar on Monday, as investors added to bets against the single currency before the European Central Bank's monthly policy meeting this week.

Worries about the impact on the euro zone's fragile recovery of the crisis in Ukraine also weighed on the currency, which fell as far as $1.3119 in Asia, lows not seen since Sept. 2013. It last traded at $1.3130, flat on the day.

The euro also hit a five-week low against the British pound of 78.92 pence before recovering after softer-than-expected UK factory data.

Trading volumes dwindled later as U.S. markets were closed for the Labor Day holiday. In Latin America, the biggest mover was the Chilean peso, which weakened 0.6 percent against the dollar after the country's central bank said it considered cutting interest rates by more than it actually did last month.

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Data on Monday showed factory activity across the euro zone cooled in August as the conflict between Russia and Ukraine took its toll.

The PMI survey for Germany, Russia's biggest trade partner in the European Union, fell to an 11-month low, while the index for France fell further below the 50 mark that separates expansion from contraction.

Ukrainian President Petro Poroshenko warned a ``full-scale war'' was imminent if Russian troops continued an advance in support of pro-Moscow rebels as Europe and the United States threatened Russia with new sanctions.

Analysts said the risk to euro zone growth posed by the Ukraine conflict and stubbornly low inflation should keep pressure on the European Central Bank to provide further stimulus at some stage, if not this week.

"There are many reasons to continue selling the euro,'' said Lutz Karpowitz, currency strategist at Commerzbank.

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"First of all, the escalating situation in Ukraine, which might lead to further sanctions, thus increasing the risk of the euro zone economy being affected by the crisis. Even more important is the ECB rate meeting.''

While Commerzbank does not expect the ECB to announce asset purchases, or quantitative easing, when the governing council meets on Thursday, the uncertainty about further policy action is likely to keep the euro on the defensive, Karpowitz added.

Huge bearish bets

The euro started September on a subdued note after posting its second straight month of losses versus the greenback in August, when it slid 1.9 percent following a 2.2 percent drop in July. Speculators' short positions against the euro are near their highest in two years.

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Analysts at Barclays said it was too soon for the ECB to announce new policy measures, given that the two most powerful policies announced in Junenew long-term loans for banks and asset-backed securities purchaseshave not yet been deployed.

"But a minority expect new policy at this week's meeting. As a result, inaction may be greeted by temporary relief from euro depreciation, but we would see any short-term rallies as a selling opportunity,'' they wrote in a note.

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The euro held steady above a near two-year low versus the Swiss franc after the head of the Swiss National Bank (SNB), Thomas Jordan said it stood ready to intervene in the currency market to defend its cap on the franc.

The euro was at 1.2071 francs, staying above last week's low of 1.2049 on trading platform EBS, its lowest versus the Swiss franc since late 2012. The SNB introduced a 1.20 per euro cap in 2011 to prevent the franc's strong appreciation from hurting the economy, although it has not had to defend the cap for the last two years.

The Swedish crown fell to a three-week low against the euro after Sweden's manufacturing sector PMI fell more than expected in August. The Riksbank meets later this week, but is unlikely to do much, having lowered the repo rate by 50 basis points in July.

Despite the political tension, there was no meaningful safe-haven bid for the yen, which saw the dollar edge up 0.2 percent to about 104.28 yen.

—By Reuters