June 1 (Bloomberg) -- The euro approached an eight-month low against the dollar after an industry report showed manufacturing in the region contracted more than expected in May.

``There's very little reason to be buying the euro at the moment,'' said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London. Economic ``growth remains very sluggish in the eurozone and that's not going to change anytime soon.'' It fell to the lowest since January versus the yen.

Against the dollar, the euro dropped to $1.2274 at 10:09 a.m. in London from $1.2304 late yesterday in New York, according to electronic foreign-exchange dealing system EBS. It fell below $1.23 yesterday for the first time since October after French voters rejected the European Union constitution on May 29.

The currency also weakened after Germany's Stern magazine reported German Finance Minister Hans Eichel and Bundesbank President Axel Weber discussed a possible failure of European monetary union. The euro is off to its worst start of a year since 2001, down 9.3 percent compared with the dollar.

``This is extremely bad timing and has undoubtedly compounded euro selling,'' said Monica Fan, head of global foreign-exchange research at RBC Capital Markets Ltd. in London.

The euro retreated from as high as $1.2341 after the magazine said Eichel and Weber, who represents Germany on the European Central Bank's policy committee, discussed the euro's potential failure with economists. The magazine quoted Joachim Fels, chief fixed-income economist at Morgan Stanley, who took part in the meeting. Fels declined to comment.

``We can neither confirm nor deny'' that a meeting took place, said Bundesbank spokesman Wolf-Ruediger Bengs in a telephone interview. ``We hope to issue a statement shortly.''

The German finance ministry declined to comment on the Stern report. Spokeswoman Sandra Hildebrandt called the euro a success story.

Manufacturing

An index based on a survey of purchasing managers in the euro region compiled by NTC Research Ltd. for Reuters Group Plc fell to 48.7 from 49.2. The median forecast of economists polled by Bloomberg was for a reading of 49.

In the U.S., the Institute for Supply Management will say today its factory index fell to 52.1 last month from 53.3 in April, according to the median estimate from economists in a Bloomberg News survey.

The projected reading is the lowest since June 2003, when manufacturing started an uninterrupted expansion. Numbers higher than 50 indicate growth. Lower ones mean contraction.

Europe's common currency is retreating as the region's economy falters. The economic expansion in the U.S. is poised to exceed Europe's for a fourth consecutive year.

``There's now uniform weakness across the big economies in Europe,'' said Adrian Foster, head of currency strategy at Dresdner Kleinwort Wasserstein in London. ``The euro is dropping away.''

Japanese Economy

The yen also advanced against the dollar and euro on optimism Japan's economic recovery is gathering pace. Japan's monthly base salaries rose for the first time in more than four years in April and wages increased for the third month in four, a government report showed.

Japan's unemployment fell to a more than six-year low as household spending rose for the first month in three, the government said yesterday. Rising wages and an improving job market are stoking a rebound in consumer spending, which accounted for more than half of the first quarter's 5.3 percent annual pace of growth.

``The Japanese economic outlook is pretty good, improving sentiment for the yen,'' said Tohru Sasaki, a currency strategist in Tokyo at JPMorgan Chase & Co. and a former Bank of Japan trader. ``The yen could be an out-performer.'' JPMorgan expects the yen to gain to 100 versus the dollar by the end of September, he said.

To contact the reporter on this story: Jake Lee in London Jlee127@bloomberg.net

Last Updated: June 1, 2005 05:10 EDT