* Euro down vs dollar after surge on Friday * US manufacturing report increases risk aversion in NY session * Market players start to question EU summit deal NEW YORK, July 2 The euro fell against the U.S. dollar on Monday while the dollar fell versus the yen as risk aversion rose following a report showing the U.S. manufacturing sector unexpectedly contracted in June for the first time since July 2009. The data was another sign the U.S. economic revovery is slowing and added to uncertainty among investors over a deal to stabilize euro zone debt markets. "It shows that a long-time bright spot for the economy is in decline and that adds to worries about the fragile state of the U.S. economy," said Joe Manimbo, market analyst at Western Union Business Solutions in Washington. "It can also set the stage for a soft jobs number that will come on Friday." Troubling investors was opposition from Finland and the Netherlands to the use of the euro zone's permanent bailout fund to buy government bonds in the secondary markets. The stance of the two countries obliterated positive sentiment from last week's summit deal in which European leaders decided that rescue funds would be available to stabilize bond markets. The dollar was last down 0.5 percent against the yen at 79.35 yen after falling as low as 79.29 yen after the U.S. data. The euro was last at $1.2579, down 0.6 percent, after falling as low as $1.2567 after the U.S. data. Setting the tone for early trading was the Finnish government's position that the rescue fund's bond buying from secondary markets would require unanimous support from member states. The comments put into question whether the plan would go ahead as such unanimity seems unlikely given opposition from Finland and the Netherlands. "The tape bombs out of Europe that are likely to persist, as always, will make things even worse," said Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut. . "Already last night we had the Finnish and Dutch on the wires reiterating that ESM bond buying will be decided on a case by case basis, underlying their negative view on bond buying generally." Europe will remain in the spotlight with the European Central Bank expected to ease policy at a meeting this week. ECB AHEAD The ECB is expected to cut its main refinancing rate by 25 basis points to 0.75 percent o n Thursday, with expectations that the deposit rate it pays banks to park cash overnight may also be cut, to zero. Some players are hoping the ECB will also announce fresh stimulus measures to shore up the faltering euro zone economy. The market will be disappointed if the ECB fails to deliver on those expectations, analysts said. U.S. markets will be closed on Wednesday for the U.S. Independence Day holiday which may also lower liquidity the day before the ECB meeting. "The juxtaposition of a holiday-broken week in the U.S. with the amount of economic information we are going to receive this week is making risk taking extremely dangerous," said Bechtel. EUPHORIA FADES Monday's trading was in sharp contrast to Friday when the euro surged around 1.8 percent against the dollar after leaders agreed to let Europe's rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states. But details were sketchy and questions remained whether, even if authorized by member states to do so, the rescue fund would have enough money to provide a firewall from a debt contagion that could ensnare larger peripheral economies. Many market players said the euro's rally could fade, especially if peripheral bond yields started to climb back toward recent euro-era highs. Italian and Spanish 10-year yields slipped on Monday but their funding costs remain high in historical terms. "The optimism will fade as the week unfolds and if yields in Italy and Spain increase there will be further pressure on euro/dollar," said Lutz Karpowitz, FX strategist at Commerzbank in London. "It (the deal) is just spending more money from donor countries and receiving more money from debt-ridden countries. This will lead to political friction and is not a long-term solution." The single currency fell 1.2 percent against the yen to 99.80 yen. On Friday, the euro posted its biggest one-day rise against the yen since March 2011. T h ere was talk of profit-taking in the euro against the yen by hedge funds, traders said.
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