* Euro wobbles lift dollar index to highs seen in mid-Feb
* Soft German inflation cements expectations of ECB action
* Eyes on EZ inflation reading at 0900 GMT
(Updates quotes, prices)
By Anirban Nag
LONDON, June 3 The euro struggled near recent
lows on Tuesday, before euro zone inflation numbers that are
expected to highlight declining price pressures in the region
and bolster the case for aggressive monetary stimulus from the
European Central Bank.
Euro zone flash inflation data for May is due at 0900 GMT
and while the consensus is for a 0.7 percent rise year-on-year,
a number of big banks have already slashed their forecasts after
soft German numbers on Monday.
Barclays, RBS and JPMorgan now expect an annual inflation
reading of 0.5 percent, way below the ECB's target of near or
just below 2 percent. A softer reading will boost the chances of
the ECB loosening policy when it meets on Thursday. Measures are
expected to include negative deposit rates, the rates at which
banks park excess cash with the ECB, and that could see the euro
come under more pressure, analysts said.
The euro was trading flat at $1.3601, near a 3-1/2
month trough of $1.3586 plumbed late last month. Traders said
with most speculators already running bets against the common
currency only a weaker-than-expected inflation reading could
take the euro towards $1.3580 - levels last seen in
"Things might look a little different if the inflation rate
only reaches 0.4 percent," said Antje Praefcke, currency analyst
at Commerzbank. "This might wake up the odd sleepy heads and
create a little more pressure on the euro. But even then things
are likely to peter out in the area of $1.3530-50."
Traders said for the euro to drop sharply, the dollar has to
strengthen further. U.S. factory orders for April are due on
Tuesday and a robust number may boost Treasury yields and help
The dollar hovered near a four-month high against a basket
of major currencies bolstered by recent upbeat U.S. data.
Trading was choppy in Asia, reflecting some confusion after
the U.S. Institute for Supply Management corrected its
manufacturing activity index for May to 55.4, from a
below-consensus reading of 53.2. The ISM said it had to make the
correction due to an error in applying the seasonal adjustments.
U.S. Treasury yields rose as a result, helping boost the
dollar's allure. The dollar index stood at 80.60, within
close reach of Monday's four-month high at 80.681.
"Following yesterday's U.S. data confusion, the dollar has
maintained its recovery trend and we expect further broad-based
gains today," Morgan Stanley said in a daily note.
"We maintain our long dollar strategies, with dollar/yen
remaining the exception to the rule and where we have used the
recent rebound to re-establish dollar short positions."
Against the yen, the greenback fetched 102.30, having
risen 0.6 percent on Monday in its biggest one-day rise in over
The Australian dollar inched up after the Reserve Bank of
Australia kept interest rates unchanged and refrained from
trying to talk the currency down as some market watchers had
speculated. It rose 0.3 percent to $0.9275.
(Additional reporting by Shinichi Saoshiro in TOKYO; Editing by