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.