* Euro drops as EZ manufacturing activity slows
* Swissie extends rally as investors test SNB resolve
* Cyclical currencies seen vulnerable to U.S. ISM data
(Adds details on Spanish auction, updates prices)
By Anirban Nag
LONDON, Sept 1 The euro fell against the dollar
and the Swiss franc on Thursday, and could extend losses if
fresh evidence emerges that manufacturing output in the United
States shrank after euro zone data showed the sector
contracting, disappointing some investors.
The yen stayed under pressure on dollar buying by Japanese
accounts, lifting the U.S. currency to around 77 yen and
soothing jitters that another round of intervention by Tokyo
authorities may be on the way.
The Swiss franc climbed against the euro and the
dollar , extending spectacular gains made on Wednesday
with investors testing the resolve of the Swiss National Bank,
which has so far kept away from intervening.
The euro was down 0.7 percent at $1.4272, with losses
accelerating after it triggered stops on the break of $1.4350 on
selling by some quasi-sovereign investors. It fell below its
100-day moving average, which comes in at $1.4364, and the
21-day moving average at $1.4350.
It extended losses after data showed German manufacturing
activity grew at its slowest pace in almost two years, while
similar business in other major euro zone economies contracted.
European shares also traded lower .
Not helping the euro's cause was sluggish demand at a
Spanish bond auction, days after a weak response to an Italian
debt auction, and highlighting increased investor wariness about
the festering euro zone debt crisis. .
The debt crisis is likely to hurt growth prospects, while
the gloomy euro zone manufacturing sector readings add to
evidence that the global economy is slowing.
The U.S. ISM manufacturing index is due later in the session
and analysts expect a reading of 48.5 in August versus 50.9 in
July , indicating contraction.
"There is a risk of a sub-50 reading in the U.S. ISM
manufacturing index. If that happens, cyclical and commodity
linked currencies will underperform," said Audrey
Childe-Freeman, EMEA head of currency strategy at JP Morgan
"The global economy is clearly going through a marked
slow-down in economic activity, and the market is trying to
assess whether this will be just a soft patch or whether we are
heading towards a recession."
Growing worries about a recession are likely driving more
investors into the relative safety of currencies such as the
Swiss franc and the yen.
The euro fell 1.5 percent against the Swiss franc to 1.1407
francs , while the dollar was 0.8 percent lower on the
day at 0.7993 francs .
The franc made hefty gains on Wednesday after a top
government official said Switzerland would have to live with a
strong currency and there was little sign of action from the
Swiss central bank. The SNB has flooded the market with francs,
cut rates to near zero and intervened in the swap market to
bring the franc down from record highs.
Traders said the SNB was reportedly checking rates in the
Swiss franc forward market, although it was yet to intervene to
drive down forward rates.
"The SNB's sight deposit target of 200 billion francs has
likely been reached by now and, given the silence from the SNB,
investors might now try to test the SNB's resolve," said Chris
Walker, currency strategist at UBS.
The dollar rose as high as 77.25 yen in the Asian session
after a British fund, some U.S. accounts and several Tokyo banks
followed a major Japanese bank in buying dollars. Traders said
the large dollar purchases appeared to be a specific transaction
unrelated to fundamentals or particular positions.
The dollar last traded up 0.3 percent at 76.90 yen.
The Aussie pared gains made after Australian retail
sales and capital spending data beat market expectations, as the
negative impact of a rate cut by the Brazilian central bank
The Aussie was down 0.13 percent at $1.0685, off a one-month
peak of $1.0733. The Brazilian rate cut -- the first in two
years -- was taken by some market players as a further sign of
weakness in the global economy, prompting them to take profits
on the recently outperforming New Zealand dollar. The kiwi fell
0.8 percent to $0.8474 .
(Editing by Nigel Stephenson)