NEW YORK (MarketWatch) -- The U.S. dollar was mixed Monday, while the Japanese yen retreated against most major counterparts amid a rebound in risk appetite that provided modest support for Asian and European stocks.
The euro pared earlier gains and the British pound turned negative versus the U.S. currency, with policymakers from both the Bank of England and the European Central Bank expected to cut interest rates later this week.
The dollar index (DXY:
85.96, +0.33, +0.4%) , a measure of the greenback against a trade-weighted basket of six currencies, was little changed at 85.828 from 85.834 in late North American trading Friday, after a report Monday morning showed manufacturing contracted more than expected in October.
The Institute for Supply Management said its factory index fell to 38.9%, the lowest since 1982, from 43.5% in September. Economists surveyed by MarketWatch predicted the index would decline to 41.5%.
Euro action
The euro was little changed at $1.2760 from $1.2751. The euro lost more than 9% against the dollar in October.
"Movements in equity and commodity markets have been fairly pivotal in how currencies have traded in October and could again be instrumental this week if BOE and ECB rate decisions go as forecast," wrote strategists at Lloyds TSB.
The ECB is widely expected to cut its key lending rate, which stands at 3.75%, when its rate-setting Governing Council meets Thursday.
Meanwhile, the Markit purchasing managers index for the euro-zone manufacturing sector fell to 41.1 from 45.0 in September. That was below a preliminary reading of 41.3. A figure of less than 50 indicates a contraction in activity, while a reading of more than 50 signals expansion.
British pound
The British pound bought $1.5862 after posting a strong rise to $1.6204 against the greenback, up from $1.6069 late Thursday, after dropping around 9% in October.
The Bank of England is expected to cut its key lending rate by at least a half-point to 4% on Thursday, with a growing number of economists penciling in an unprecedented cut of a full percentage point to 3.5%.
A full-point rate cut by the Bank of England "is almost priced in and we would not trade currencies from a rate-differential, but from a risk-appetite point of view," said strategists at BNP Paribas.
Sterling had little reaction to an unexpected rebound in the purchasing managers index for the British manufacturing sector.
The CIPS/Market purchasing managers index for the U.K. manufacturing sector rose to 41.5, up slightly from the record low of 41.2 in September.
Economists had expected PMI to fall to 40.
Yen retreats
The dollar bought 98.90 yen, compared to 98.67 yen late Friday. The dollar fell more than 7% against the yen last month.
The Japanese yen posted sharp gains across the board in October, as traders abandoned once-popular carry trades amid mounting turmoil in world financial markets.
Carry trades center on borrowing in the yen and other low-yielding currencies and then buying assets denominated in higher-yielding currencies.
The dollar, to a lesser degree, also soared in October. The greenback was boosted as traders fled emerging and other overseas markets, as well as some safe-haven buying amid global economic and market turmoil.
"We do not expect global recession fears to wane considerably," the UniCredit strategists said in a research note.
That means the yen should remain supported over the medium term, and that tests of the 105 yen level versus the euro and the 88 level against the dollar can't be ruled out, they said.
