Dollar falls on weak factory data, emerging market jitters

Posted by Reuters

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The dollar fell to a two-month low against the safe-haven yen on Monday on persistent jitters over troubles in emerging markets and as surprisingly weak domestic manufacturing data spurred worries about U.S. economic growth.

The latest omen about slowing U.S. growth raised bets the Federal Reserve might refrain from a further reduction in its bond purchase stimulus, analysts said.

The U.S. central bank last week voted to reduce its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $65 billion, following a $10 billion reduction in December.

“Markets were keyed for a strong manufacturing report, and they got slammed, and the dollar along with them, as January’s ISM survey at 51.3 showed this leading sector far weaker than expected,” said Joseph Trevisani, chief market strategist at WorldWideMarkets Online Trading in Woodcliff Lake, New Jersey.

The Institute for Supply Management on Monday said its index of U.S. factory activity fell to 51.3 last month, the lowest level since last May, from a recently revised 56.5 in December. The most alarming aspect of the report was the new orders component, which recorded the largest monthly drop in 33 years.

Wall Street stocks also sold off on the data. The dollar shed 0.9 percent against the yen to 101.07 yen, which was its lowest level since late November. .N

Against a basket of major currencies, including the yen, the dollar lost 0.2 percent at 81.103, wiping out Friday’s gain.

The euro, in reaction to the disappointing U.S. factory data, recovered from a two-month low against the greenback. The single currency earlier fell against the dollar as expectations grew that the European Central Bank might make an aggressive to combat deflation when it meets on Thursday. <ECB/PDF>

With the ECB’s main interest rate already at a record low 0.25 percent, some analysts expect the central bank will start buying sovereign bonds to loosen monetary conditions — similar to the Fed’s quantitative easing program — to avert a downward price spiral that could cripple an economy for years.

“What really matters is deflation,” said Hans Redeker, head of global currency strategy at Morgan Stanley in London. “The euro is going to find it very difficult to hold its value.”

On Friday, data showed a surprise drop in euro zone inflation for January to 0.7 percent year-on-year. Analysts had expected prices to rise 0.9 percent.

Earlier, the euro fell against the dollar on speculation about ECB action, hitting its weakest level against the greenback since late November before rebounding. It last traded up 0.2 percent at $1.3514.

Against the yen, the single euro zone currency held near a two-month trough at 136.80 yen, and it dropped to its lowest level against the Swiss franc in more than six weeks, at 1.2189 franc.