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Dollar Falls vs. Euro on US Manufacturing Slump

Reuters
Wednesday, 2 Jan 2008 | 11:52 AM ET

The dollar fell Wednesday, hitting a one-month low against the yen, after a gauge of the U.S. manufacturing sector last month tumbled to its lowest level since April 2003, increasing expectations for more Federal Reserve interest rate cuts.

The Institute for Supply Management reported its index of U.S. factory activity fell to 47.7 in December, reflecting contraction in the sector and dipping closer to levels associated with U.S. recessions, causing dealers to sell the greenback in earnest at the start of 2008.

"The data provides some important hints that the previously relatively resilient manufacturing has lost substantial momentum, and provides some tentative evidence that the U.S. economy may be weighing on global demand more than global demand is able to bolster the U.S. manufacturing sector," said Alan Ruskin, chief international strategist with RBS Greenwich Capital.

"Net-net there is nothing positive for the dollar here."

By morning in New York, the dollar tumbled to the lowest level in almost a month against the yen to 109.53 yen before edging back to 109.60 yen, down 1.7 percent on the day.

The euro was up 1 percent at $1.4733, after rallying more than 10 percent in 2007. It hit an all-time high in November of $1.4968, according to the platform EBS.

The dollar fell 1.4 percent to 1.1175 Swiss francs . Sterling slipped 0.3 percent to $1.9796 .

The Institute for Supply Management's report also showed the prices component for December rose despite a decline in the headline number, suggesting to some analysts that a negative combination of higher inflation and no economic growth may be unfolding.

"Not very good at all, particularly looking at the prices paid" index, said Mark Meadows, currency strategist at Tempus Consulting in Washington. "It came in above expectations, which suggests that there really may be stagflation in the coming months," he said.

Flight from Risk

Federal funds futures now completely reflect a quarter percentage point cut in January, and the implied fed funds rate by mid-year 2008 dropped to 3.58 percent from 3.81 percent a week ago.

The market will be focused on the minutes due this afternoon of the Federal Reserve's December policy meeting, when it decided to cut each of its federal funds and discount rates by 25 basis points. Shortly after that meeting the Fed, in concert with other major central banks, created a funding facility to loosen credit markets.

Traders have been keeping a wary eye on money markets to see if funding pressures had eased now that year-end had passed. Early signs were that interbank rates had indeed dipped and risk spreads had narrowed somewhat, but analysts emphasized it was early days.

Both the Fed and the European Central Bank pumped huge amounts of cash into money markets ahead of year-end but much of that will have to be repaid in coming weeks.

For now, investors were sticking with safety above all else. Carry trades, in which a low-yielding currency such as the yen is borrowed to fund purchases of higher yielding assets, were being liquidated to the benefit of the yen.

Sterling plummeted 2 percent against the yen to 217.30 yen and touched the lowest level since August 2006, according to Reuters data.

Other markets also reflected a flight from anything perceived as risky with gold climbing to a record high above $850 per ounce and crude prices crept closer to $100 a barrel.

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