The euro hit a one month high against the dollar and sterling late yesterday, supported by a string of weak US data over the course of this week, as well as hawkish comments from the ECB. Markets are nervous that this afternoon’s US non-farm payrolls report for May will be weak, further confirmation that the economic recovery is struggling to hold momentum. Markets had been expecting a rise of around 190,000 but this has now been revised downwards to 150,000 in light of Wednesday’s much weaker than anticipated ADP employment report. Many even see a downside risk to this revised forecast.

A weak number is likely to weigh heavily on the dollar going into the weekend as it will reinforce the markets view that the Federal Reserve remains committed to its ultra loose policy stance. Indeed, on the basis of the weak tone to recent data releases, markets have pushed out expectations for US interest rate hikes to the second quarter of next year, with some even speculating that the Fed could extend its quantitative easing measures beyond the end of this month.

As well as the weak US data, the euro also found support in comments from the ECB’s Trichet supporting the establishment of a eurozone finance ministry. A successful Spanish T-bills auction, and signs that a new deal to provide further financial aid to Greece could be ready by today also helped. Moody’s also warned of a possible risk to the US sovereign debt rating unless progress was made on reducing debt levels. Meanwhile, versus sterling, the euro was aided by dovish comments from the Bank of England’s Fisher, which added to the view that a weak domestic economy will keep UK rates on hold for some time yet.