FOREX-Euro remains stuck near two-month low as bears await dovish ECB

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* Worsening data bolsters case for dovish ECB
* Sterling stable after Johnson becomes British PM
* Dollar supported before Fed meeting next week

(Adds analyst quote, Australian dollar)
By Stanley White
TOKYO, July 25 (Reuters) - The euro was mired near a
two-month low on Thursday before a European Central Bank meeting
that could signal monetary easing as growth in the currency zone
falters.
Sentiment towards the single currency EUR=EBS took a big
hit after data on Wednesday showed Germany's manufacturing
sector contracted at the fastest pace in seven years while
French business growth unexpectedly slowed, sending European
bond yields lower.
The Australian dollar AUD=D3 dipped after the country's
central bank governor said policy could be eased again if
needed, and that it was "reasonable" to expect interest rates to
remain low for an extended period. Investor focus in Asia remained predominantly on global
central bank and political developments, particularly in Europe
and the United States.
Sterling GBP= held onto gains it made after Boris Johnson
became Britain's new prime minister on Wednesday, but investors
are still wary of a no-deal Brexit in which Britain would leave
the European Union without a trade agreement.
The dollar USD= found support after U.S. Treasury
Secretary Steven Mnuchin said he would not advocate a weaker
currency.
Investor focus shifts to the ECB's meeting later on Thursday
and a widely expected interest rate cut from the U.S. Federal
Reserve next week, both of which are expected to dictate the
tempo for currencies and bond yields in coming months.
"I see more downside for the euro, because there are no good
signs coming from Europe at the moment," said Tsutomu Soma,
general manager of fixed income business solutions at SBI
Securities in Tokyo.
"Don't expect European bond yields to rise anytime soon. The
U.S. is headed toward lower rates, which used to be a supportive
factor for the euro, but that is no longer the case."
The common currency traded at $1.11350 after touching
$1.11270, its lowest since May 31.
The euro has fallen 2.0% this month on increased
speculation the ECB would join other central banks in easing
policy as a trade war between the United States and China
weakens the global economy.
Traders see a 48% probability that European policymakers
will lower a key deposit rate by 10 basis points to minus 0.50%,
according to interest rate swaps. ECBWATCH
If the ECB keeps policy on hold Thursday, economists say
President Mario Draghi could flag a rate cut for the next
meeting in September. The Ifo institute will release its closely-watched index of
German business sentiment later on Thursday, which will provide
further clues about the health of Europe's largest economy.
To be sure, while sentiment for the euro remains weak, some
investors argue that further declines in it and European
government bonds are likely to be limited.
"Europe's economic fundamentals have worsened, but at this
point most of this is already priced into the markets," said
Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai
Asset Management Co in Tokyo.
"The ECB needs to ease policy, but I don't think European
yields can fall much more. I don't want to chase the falling
euro and falling yield trade at this stage."
Sterling GBP=D3 was little changed at $1.2472, staging a
modest recovery from a 27-month low of $1.2382 reached last
week.
Johnson promised in his first speech as prime minister to
lead Britain out of the EU on Oct. 31 with "no ifs or buts" and
warned there would be a no-deal Brexit if the bloc refused to
negotiate.
The dollar traded at 108.130 yen JPY= , near a one-week
high of 108.290 yen.
Mnuchin told CNBC in an interview the United States benefits
from the greenback's standing as the world's reserve currency.
The dollar was also supported by a White House statement
that top U.S. negotiators will meet their Chinese counterparts
in Shanghai starting July 30.
The world's two-biggest economies are seeking a resolution
to their bruising trade war. The dollar index .DXY , which measures the greenback
against six major currencies, stood at 97.725 after touching an
eight-week high of 97.810 on Wednesday.
The Aussie slipped 0.1% to $0.6967 as Reserve Bank of
Australia (RBA) Governor Philip Lowe's outlook on keeping rates
low was taken as a dovish development. The RBA has reduced interest rates twice since June to a
record low 1% to revive growth and inflation.