Dollar tumbles after weak US services data

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The dollar fell to a four-week low against the yen and a one-week trough versus the euro on Thursday, as investors fretted that weakness in both U.S. manufacturing and service sectors could lead to a slowdown in the world's largest economy.

"It appears that the U.S. is now catching down with rest of the G10," said Ranko Berich, head of market analysis at Monex Europe in London. "So although it's not a surprise that major G10 economies are seeing a manufacturing shock and it is spreading to the rest of their economies, it is new information that we are now seeing this dynamic emerge in the United States," he added.

Expectations that the U.S. economy would continue to outperform other major economies and put pressure on the Federal Reserve to slow its interest rate cutting cycle were dampened this week after weak manufacturing and service sector surveys.

Data on Thursday showed that the Institute for Supply Management's services sector index fell to 52.6 in September from 56.4 the previous month. The survey's employment index slid to 50.4 from 53.1 in August. September's employment index was the lowest since February 2014.

The U.S. services data followed Tuesday's U.S. manufacturing report, which presented a dire picture of the sector, with the ISM reading falling to its lowest level in more than 10 years.

In midmorning trading, the dollar was down 0.4% against the yen, at 106.75 yen, falling to its lowest level in four weeks at 108.49 right after the ISM non-manufacturing report.

The dollar index fell 0.3% to 98.74, with the euro up 0.2% at $1.0983. The euro rose to a one-week high of $1.0999 after the data.

Investors are now waiting for Friday's employment report to confirm or quell recession worries. Rate futures have factored in another 25 basis-point easing at the upcoming Federal Reserve policy meeting later this month following weakness in the U.S. manufacturing data. Chances for a cut have jumped to nearly 75% after the market largely ruled out the move after what seemed like a hawkish cut last month.

"It's increasingly difficult for the hawkish members of the Fed to argue that what we're seeing is a transitory disruption in the survey data," Monex's Berich said.

The dollar has broadly gained in recent weeks as investors added long positions on expectations that other major economies, led by Europe, will underperform the United States. Latest futures data show long dollar bets at a 3-month high.

Elsewhere, sterling rallied 0.9% against the dollar to $1.24 after the head of a group of euroskeptic lawmakers in Prime Minister Boris Johnson's Conservative Party said on Thursday the government's latest Brexit proposals offered the possibility of a "tolerable deal".