(Recasts; adds comment, updates prices)
* Investors brace for rate hike in Europe
* Dollar pares losses after GM sales data
* Dollar also helped by manufacturing data
NEW YORK, July 1 (Reuters) - The dollar fell against the
euro and was little changed against the yen on Tuesday in a
volatile session as investors debated the outlook for the U.S.
economy while anticipating a rate hike from the European
Central Bank later this week.
The European Central Bank is widely expected to raise
interest rates by a quarter percentage point to 4.25 percent on
Thursday, bolstering demand for euro-denominated assets and
euros to buy them with.
The yen had climbed broadly in early trading on Tuesday,
benefiting from mounting risk aversion as heightened fears of
further losses in the banking sector and global stocks prompted
investors to sell dollars.
But U.S. stocks retraced earlier losses after General
Motors <GM.N> reported stronger-than-expected June sales,
keeping the dollar off session lows. A rise in U.S. factory
activity also helped the dollar.
"It's rangebound behavior in anticipation of the ECB rate
hike," said Michael Woolfolk, senior currency strategist at The
Bank of New York Mellon. "People are looking for an excuse to
buy euros and sell dollars."
In late New York trading, the euro changed hands 0.2
percent higher against the dollar at $1.5783 <EUR=>.
The European currency pared some gains against the
greenback after the Institute for Supply Management said its
index of national factory activity rose in June to 50.2 from
49.6 in May after four straight months of contraction. For
details, see []
"The ISM index climbed back into growth territory and
should ease some of the concerns about the outlook for the U.S.
economy that had pressured the dollar overnight," said Joe
Manimbo, a currency trader at Ruesch International in
Washington.
In Europe, data showed euro zone manufacturing activity
contracted for the first time in three years in June and output
prices matched April's year high. But analysts said Tuesday's
data will not prevent the ECB raising rates.
Yen gains against the dollar were limited as demand for the
greenback rose after the ISM report.
The dollar last traded near flat at 106.10 yen <JPY=>, but
well off the session low of 105.24 yen, while the euro gained
0.2 percent to 167.47 yen <EURJPY=R>.
Markets have begun to take the view that the Federal
Reserve has little scope to tighten U.S. monetary policy
aggressively to fight inflation given the sluggish economy.
The greenback traded 0.1 percent lower against a basket of
major currencies <.DXY> at 72.369, starting the third quarter
on the back foot.
The ISM report "should firm up the dollar a bit because one
thing that's been going on over the last few days is the market
is growing doubtful about the possibility of Fed rate hikes for
the rest of the year," said Boris Schlossberg, a senior
currency strategist at DailyFX.com, in New York.
"But if we see employment in dire straits and core job
losses going forward, the Fed will find itself in the worst
possible position -- between high inflation rates and slow
growth. It will be like a deer frozen in headlights," he
added.
The yen had gained broadly overnight with risk aversion in
currency markets stoked by a slide in global stocks. The yen
tends to garner support in times of heightened risk aversion as
investors reverse trades financed by borrowing the Japanese
currency at low interest rates.
(Additional reporting by Steven Johnson; editing by Gary
Crosse)
(Reporting by Nick Olivari and Vivianne Rodrigues)
