Euro firms on Ukraine hopes, Trump knocks Mexican peso and Canadian dollar

By Alden Bentley and Stefano Rebaudo

NEW YORK/MILAN (Reuters) -The euro rebounded on Monday as hopes for a Ukraine peace deal improved, and interest rate differentials moved against the dollar ahead of a possibly pivotal steer on U.S. economic growth in the February payrolls report late in the week.

The Canadian dollar and Mexican peso both hit one-month lows in afternoon trade after U.S. President Donald Trump said 25% tariffs on those countries would start Tuesday, without offering specifics.

Ukrainian President Volodymyr Zelenskiy received a warm welcome in Britain after his meeting with U.S. President Donald Trump ended in disaster on Friday, nudging the euro to a 16-day low. British Prime Minister Keir Starmer said on Sunday that European leaders had agreed to draw up a peace plan to present to Washington.

The Kremlin said on Monday that someone would have to force Zelenskiy to make peace.

The single currency was up 0.89% at $1.0468, a bit below the day's high but well above Friday's low of $1.0359.

The single currency found support after the midmorning release of February's U.S. ISM manufacturing PMI that came in at 50.3, below expectations and January's 50.9 reading.

The major scheduled events of the week look to be Thursday's European Central Bank policy meeting and Friday's U.S. employment report.

Analysts said a possible peace deal in Ukraine and a likely increase of fiscal spending by euro zone countries could provide a boost to future growth, supporting the currency.

European Commission President Ursula von der Leyen will inform member states on Tuesday about plans to strengthen the European defence industry and the EU's military capabilities, she said on Monday.

Meanwhile, the parties in talks to form Germany's new government are considering quickly setting up two special funds potentially worth hundreds of billions of euros, one for defence and a second for infrastructure, three people with knowledge of the matter told Reuters.

"The defense side of things is probably somewhat supportive," said Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto.

Osborne said a smaller-than-expected fall in euro zone inflation also helped underpin the euro by undermining the case for further ECB easing, although few doubt they will cut rates again.

Consumer price inflation in the 20 nations sharing the euro fell to 2.4% year on year in February from 2.5% a month earlier, just above expectations for 2.3% and moving a step closer to the European Central Bank's 2% target, data from Eurostat showed on Monday.

"Short-term variables are shifting quite significantly in favor of the euro. Over the last little while, short-term spreads, rate differentials have narrowed quite significantly," he said, adding that differentials are still very negative for the euro.

The U.S. dollar index - which measures the currency against the euro, sterling, yen, Canadian dollar and two other major rivals - fell 0.48% to 106.78.

The Canadian dollar and the Mexican peso fell to their lowest since Feb 3 after Trump said tariffs would go into effect Tuesday on the two U.S. neighbors and largest trading partners and that there was no room left for a deal.

Dollar/Canada was up 0.4% at 1.4523 and the dollar was up 0.9% vs the peso at 20.7165 pesos.

"I think the direction of the market move was correct and what you would expect with a major announcement like this, but I think in terms of the percentage of the move and how long it's lasted, it's fairly muted," said John Doyle, CEO of Monex USA, in Washington, DC.

Against the Japanese yen, the dollar weakened 0.26% to 150.23.

Bitcoin surged back to the cusp of $95,000 earlier on Monday, before dipping back under $90,000, after Trump on Sunday named the token as among those to be included in a new strategic cryptocurrency reserve.

The world's largest digital currency fell below $80,000 late last week amid an outflow from spot bitcoin ETFs, disappointment that Trump had not yet delivered on a promised bitcoin-positive crypto policy and selling in sympathy with the slide in tech shares on Wall Street.

It was still up about 1.7% from late Friday at $85,665.91. Ethereum was down 4.74% to $2,119.73.

(Reporting by Alden Bentley and Stefano Rebaudo; Editing by Andrea Ricci and Nick Zieminski)