PARIS, Jan 3 (AFP) - The dollar gained support Monday from better-than-expected US manufacturing data and was stable against the euro in sluggish trading reflecting the holiday closure of markets in London and Tokyo.
The single European currency was at 1.3475 dollars in late-day deals after 1.3471 in the early afternoon. The dollar was trading at 102.86 yen against 102.73 earlier in the session.
The greenback drew strength from the Institute for Supply Management's main index of activity in the US manufacturing sector, which improved to 58.6 in December from 57.8 in November and eclipsed expectations of 58.3.
"This represents the second consecutive monthly increase in the index and the highest reading on this measure of manufacturing activity since August 2004," said John Ryding, analyst at Bear Stearns.
The solid economic performance may therefore entice the US Federal Reserve to increase the cost of borrowing quicker than expected.
In December, the rate-setting Federal Open Market Committee raised its target for overnight interest rates by a quarter point to 2.25 percent, the fifth such increase in 2004. It took the key cost of borrowing to its highest level since October 2001.
Friday's US jobs report will be more crucial though in the direction of US interest rates, analysts said.
Earlier in the session, the euro managed to claw back all the losses it suffered during Asian trading and moved back up above the 1.35-dollar mark as European investors returned to the market following the New Year break.
But with London closed for a public holiday, volumes remained thin.
London accounts for around 30 percent of total global currency trading, while the other financial centers in Europe, such as Frankfurt, account for just over 15 percent in total.
The euro had also been supported by a stronger-than-expected manufacturing survey.
The eurozone's manufacturing purchasing managers' index rose to a seasonally adjusted 51.4 in December from 50.4 the previous month amid expectations of a modest decline to 50.3.
A reading above 50 indicates that the manufacturing sector is generally expanding, while a reading below 50 suggests contraction.
"The euro's strength may not be having such a negative impact on business sentiment as has been widely assumed," said Ray Attrill, research director at 4CAST.
If it proves that European businesses are learning to live with the strong euro, which hit an all-time high against the dollar on December 30 of 1.3668, then the European Central Bank may become even more reluctant to intervene in the market to lower the value of the currency, he added.
The ECB's last foray onto foreign exchange markets was in late 2000, when it acted in coordination with other G7 countries to buy euros and sell dollars after the European currency plunged to a record low of 0.8230 dollars.
The dollar has been in the doldrums in recent months as concerns over the US budget and current account deficits combined with talk that central banks around the world are reviewing the structure of their currency reserves away from the greenback.
There is also a general feeling that the Bush administration is following a policy of benign neglect and that that it welcomes a weaker dollar to help improve the current account imbalance.
The euro in late trade was at 1.3474 dollars, against 1.3471 in the early afternoon, 138.60 yen (138.38 earlier) and 0.70718 pounds (0.70650).
The dollar was trading at 102.86 yen (102.73 earlier) and 1.1466 Swiss francs (1.1469).
The pound sterling was at 1.9055 dollars (1.9067 earlier), 195.99 yen (195.87) and 2.1847 Swiss francs (2.1866).
01/03/2005 17:35 GMT - AFP