Dollar falters after soft US manufacturing data

Aaron M. Sprecher | Bloomberg | Getty Images

The dollar fell against the euro and the yen on Tuesday after data showed weakness in the U.S. manufacturing sector and a lower-than-expected rise in construction spending.

Against a basket of six major currencies, the greenback fell from a roughly 2-1/2-year peak hit earlier in the session to trade little changed on the day. Data showed the U.S. manufacturing sector contracted in September to its weakest level in more than a decade as business conditions worsened amid trade tensions between China and the United States.

The Institute for Supply Management (ISM) said its index of national factory activity fell to 47.8, the lowest reading since June 2009. A reading below 50 signals the domestic factory sector is contracting.

"The ISM manufacturing data was pretty poor. No matter how much you slice and dice it, it's a pretty negative report," said Mazen Issa, senior FX strategist at TD Securities in New York. "Most of the weakness in the dollar has been mostly concentrated against the reserve currencies, so against the yen and euro," he added.

The dollar was also pressured by a report showing U.S. construction spending barely rose in August, as the largest increase in private residential investment in nine months was offset by a second straight monthly decline in outlays on nonresidential projects. That said, the dollar's outlook remained solid despite Tuesday's weak data, analysts said.

"The only concern there is that the ISM report could inspire far more rapid easing from the Federal Reserve," said TD's Issa. "But even if they do cut, the yield advantage still remains quite high in the U.S."

With rate cuts in Australia, final PMI readings in Europe at seven-year lows and weak confidence readings in Japan, the dollar scored its biggest quarterly gain in the third quarter since June 2018.

On Tuesday, a September survey showed euro zone manufacturing activity had contracted the most in almost seven years. In late morning trading, the dollar index was little changed at 99.353, after earlier touching 99.58, its highest level since May 2017.

The next target for the dollar is the January 2017 high of 103.82. The euro was up 0.2% against the dollar at $1.0912. The weakness in economic indicators was not confined to Europe. Japanese big manufacturers' business confidence worsened to a six-year low in the July-September quarter, the Bank of Japan's closely watched Tankan survey showed.

Against the yen, the dollar fell 0.2% to 107.86 yen.

Elsewhere, the Australian dollar was the main underperformer in the G10 after the Reserve Bank of Australia cut interest rates and expressed concern about job growth. The Australian dollar fell 0.9% to $0.6689 after the RBA cut its cash rate to a record low of 0.75%, as expected.