The euro yesterday held on to the bulk of the gains against the dollar recorded on Friday after tame US jobs data lessened the chances of a US rate increase later this month. Figures showing a sharper-than-expected drop in German industrial production in June failed to upset the currency.

Softer-than-expected July US payroll data propelled the euro above $0.91 on Friday, pulling it away from the 10-week low of $0.8990 it had set just a day earlier.

But while the single currency's ability to hold ground was encouraging, dealers were reluctant to bet on the euro too aggressively as long as the US economy was seen to be growing at a faster pace than that of the euro zone.

Traders said the dollar was still the favourite currency despite the weak jobs data. They were looking for more clues from key reports due out later this week.

"Right now, you can argue that there is an interest rate differential story that should support the euro," said Mr Derek Halpenny, currency economist at Bank of Tokyo-Mitsubishi in London. "But currency markets look at [economic] growth, and growth with reasonably high interest rates in the US is ultimately a good scenario for the dollar."

Against this background, and given the volatile summer trading conditions, Mr Halpenny said the euro was still at risk of testing $0.90 and revisiting its record lows.

In early trade, the euro/dollar rate was holding around $0.9080, and was just over $0.91 by late afternoon. It later fell to $0.9078.

"For the US rate outlook, the jobs data has been critical, but we still have producer prices and retail sales data out this week," said Mr Jeremy Stretch, currency strategist at the Royal Bank of Scotland Global Financial Markets in London.

Today, US second-quarter productivity numbers, along with the July producer price index, are scheduled for release. US retail sales for July are due out on Friday. The Fed has repeatedly pointed to productivity growth as key to keeping inflation in check.

Economists predicted productivity would rise 4.3 per cent in the second quarter, compared to a gain of 2.4 per cent in the first three months of the year.

Earlier in the day, the euro was briefly under pressure after German industrial production fell 3.5 per cent in June, well below analysts' forecast of an 0.4 per cent decline.

However, Germany's finance ministry said that the dip was a technical reaction to the rise in May and that the upward trend in output remains intact.

"This data is always very volatile. We had a strong increase in the previous month and people were looking for a fall," said Mr Niels Christensen, currency strategist at Societe Generale in Paris.

"It is obviously having a small negative impact on the euro, but it should not drag it down to $0.90."

Analysts said euro sentiment also remained fragile against the yen as Japanese institutions were seen bailing out of their euro zone assets to cover recent losses in Japanese equities.

Japanese stocks closed at a 17-month low on Friday as doubts about the strength of Japan's recovery gnawed at market confidence, although they enjoyed a two per cent rebound yesterday. "The euro is holding up against the dollar after we saw a little bit of a bounce last week after the US jobs numbers reduced the fears that the Fed will hike rates this month," said Mr Stretch at the Royal Bank of Scotland Global Financial Markets.

"But sentiment is still fragile as the euro has failed to make much headway. Although people do not like the yen, the fact it has managed to outperform the euro [in recent weeks] indicates that the euro is the least favoured currency."

Traders were unfazed by comments from the Bank of Japan Governor, Mr Masaru Hayami, who reiterated yesterday that he wants to abandon the zero interest rate policy as soon as possible.