The US dollar slipped back on foreign exchange markets on Monday in thin trading on a day when US markets were closed for Labour Day.

The ICE dollar index, which measures the buck's value against a trade-weighted basket of currencies, eased to 81.172 at the end of the European session from around 81.242 in late afternoon trading on Friday in North America. It was almost a case of "out of sight, out of mind" for the greenback, with attention switching from Fed Chairman Ben Bernanke's speech in Jackson Hole last week to this week's central bank meetings in Europe.

Sterling opened weaker but perked up after stronger than expected manufacturing data. The Purchasing Manager's Index (PMI) rose to 49.5, from 45.2 in July, only slightly below the 50 mark that separates expansion from contraction.

The figure was a four month high and better than the PMI reading of 46 pencilled in by analysts. It was also stronger than statistics from the Eurozone, which showed a reading of 45.1, weaker than expected.

Howard Archer, Chief UK Economist at IHS, said that since the UK manufacturing figures were better than expected it reinforced belief that the Bank of England was likely to keep all aspects of monetary policy unchanged in September, a state of affairs which would boost sentiment towards sterling.

"With the Funding for Lending Scheme still in its early stages and July's extension to Quantitative Easing due to run through to early November, it would likely need an extremely weak set of purchasing managers' surveys this week to prompt the MPC into further action at this stage," he said.

"Nevertheless, a further £50bn of QE remains very much on the cards for the fourth quarter, taking the stock up to £425bn," Archer added.

The PMI figures came just after manufacturers' body, the EEF, reported trading conditions over the last quarter had been the toughest since the end of the recession.

Rob Dobson, Senior Economist at Markit, which compiles the PMI, said overall demand remained too lacklustre to provide an imminent and sustained recovery, with investment spending still weak and domestic austerity ongoing.

"Long unsatisfied hopes that the manufacturing sector could export its way back to health also remained jilted by the marrying of a downturn in our largest export market to the onset of softer global economic growth," he said.

"The performance of the sector is therefore likely to remain subdued and volatile until underlying structural imbalances are resolved," Dobson added.

Sterling dipped as low as $1.5806 at one point before recovering to $1.5906 and then settling at $1.5888, little changed on the day. The intra-day high against the dollar was close to sterling's highest value against the US dollar in two weeks. The effective sterling exchange rate index which, like the ICE dollar equivalent, is a measurement of the pound's value against a trade-weighted basket of other currencies rose 0.25% to 84.4. Against the euro, sterling inched up 0.1% to 79.24p.

The euro made headway against the US dollar, moving up to $1.2595 from around $1.2575 on Friday. As investors anxiously await the European Central Bank (ECB) policy meeting this Thursday, Eurozone politicians continue their 'diplomacy rounds' as they hold talks on the current crisis and attempt to move forward on solutions. Perhaps the most relevant meeting of the week will coincide with the ECB's decision on Thursday, when German Chancellor Angela Merkel will hold bilateral talks in Madrid with Spanish Prime Minister Mariano Rajoy just prior to a conference with over 100 businessmen from both countries that is aimed at driving economic cooperation.

The market's attention will be focused on the results from the meeting between the two leaders and their positions on ECB bond buying or Spain's bailout request. Even as some investors expect the ECB to make some comment on plans to purchase sovereign debt to help lower borrowing costs for peripheral Eurozone countries such as Spain or Italy, various German officials have maintained staunch opposition to the proposal. In this context, Rajoy would be expected to try to convince Merkel to support the initiative and would walk into the meeting with the recent financial sector restructuring and economic reforms under arm.

Meanwhile, despite rumours that Mario Draghi had cancelled an appearance before the European Parliament, the European Central Bank (ECB) President attended a closed door parliamentary session only three days ahead of the central bank's monetary policy meeting.

Draghi said that he would be comfortable purchasing three-year bonds and that the purchase of short-dated bonds does not constitute state-financing.

JH

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