* Euro down vs dollar after surge on Friday
* US manufacturing report increases risk aversion in NY
* 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
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
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
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
Europe will remain in the spotlight with the European
Central Bank expected to ease policy at a meeting this week.
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.
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
"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
"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
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,