Euro sinks as weak data piles pressure on European Central Bank

By Marc Jones

LONDON (Reuters) - The euro hit its lowest in almost three years against the yen while European shares extended their strongest run of the year on Tuesday as data from around the region bolstered the case for more ECB stimulus next week.

Asia had risen after weak China data fanned stimulus hopes there, and the same pattern emerged in Europe as euro zone manufacturing activity expanded at its weakest pace for a year despite more deep discounting.

Markit's Purchasing Managers' Index (PMI) will make gloomy reading for the European Central Bank, a day after it was confirmed deflation is back in the bloc and a week before its next meeting where pressure for action is building.

The hopes for the central bank helped Germany's DAX (GDAXI) jump 1.8 percent and France's CAC 40 (FCHI) climb 0.9 percent, while Britain's FTSE 100 (FTSE) gained 0.7 percent as talk of a bid battle for the London Stock Exchange helped offset an 11 percent tumble in Barclays shares (L:BARC).

In the currency markets, the euro slipped to a one-month low after the PMI data while the yen was still hot to the touch having completed its best month against the dollar since 2008 and reached its highest against the euro (EURJPY=) since April 2013 overnight.

The gains came despite Japan earlier becoming the first G7 economy to sell a 10-year government bond at a negative yield, something that would usually make the currency less attractive as investors are effectively paying rather than getting paid to hold them.

"The yen strength right now is largely being dominated by (weak) risk appetite," said UniCredit's Global Head of FX Strategy Vasileios Gkionakis.

On the euro he added: "There is no doubt the low inflation and the soft economic data is keeping the pressure on the ECB to do something next week."

There was a glimmer of hope for the central bankers though as Brent oil prices (LCOc1), the big downward force on inflation for the last two years, hit their highest since the start of the year after their best month since August.

It helped German Bund yields nudge off 10-month lows after the previous day's deeper than expected fall in euro zone consumer prices had triggered fresh bond buying as inflation expectations hit their lowest on record.

The European Central Bank is expected to cut its deposit rate by at least another 10 basis points when it meets next Thursday and add to its 1.5 trillion euro bond buying scheme.

CAUTION FRAGILE CHINA

Futures markets were pointing to a 0.7 percent rebound for Wall Street when it resumes, having dropped below its 50-day moving average on Monday.

U.S. manufacturing and services sector data will feed the constantly evolving view <0#FF:> of whether the Federal Reserve can continue to squeeze up interest rates in the world's largest economy this year.

The latest rise in oil helped Russian dollar-denominated shares (IRTS) add 2 percent to their near 30 percent surge since mid-January.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) had ended up 1.3 percent too, as Chinese stocks, (CSI300) which are nudging their lowest in a year, climbed 1.8 percent after Monday's PBOC cut in banks' reserve requirements.

There was a widespread feeling more stimulus is likely too when Beijing announces a new 5-year plan for the economy at the weekend.

Official data on Tuesday showed activity in the country's giant manufacturing sector shrank for a seventh straight month in February and faster than expected.

The services sector did expand, but at the slowest pace since late 2008 and the private Caixin/Markit China Manufacturing PMI came in short of both market expectations and the previous month's reading.

"We think the PBOC easing is consistent with continued weaker-than-expected economic activity and downside risks to growth," wrote Jian Chang, an analyst at Barclays. "It should help to support market sentiment in the near term."

Japan's Nikkei (N225) erased early losses to ended up 0.4 percent although the yen's hot streak continued to drag back a market that has slumped 15 percent this year.

Against the euro, the perceived safe-haven yen gave back some territory as the PMI dust settled to leave it at 123.07 yen (EURJPY=R). It had been as elevated as 122.09, the highest since April 2013.

The dollar was buying 113 yen , edging up about 0.4 percent, while the Australian dollar added 0.2 percent against its U.S. counterpart to $0.7152 after the Reserve Bank of Australia left its rates at a record low 2 percent.

Gold also rose to $1,240 an ounce as it built on its biggest monthly gain in four years. Its appeal is being boosted by the concerns over the global economy and the spread of negative government bond yields in Europe and Japan.