on $100 crude and soft U.S. ISM report.
by Nick Olivari and Kevin Plumberg
Jan 2, 2008
NEW YORK, Jan 2 (Reuters) - The dollar slid on Wednesday as crude oil hit $100 a barrel and 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 dollar's drop against the yen accelerated, with the decline extending past 2 percent at one point as the drop in crude prices triggered a further reduction in risky trades.
"Risk aversion rises and people buy yen as crude rises," said Camilla Sutton, currency strategist at Scotia Capital in Toronto. Rising crude "generally speak to a weak U.S. dollar."
Early afternoon in New York, the dollar tumbled to the lowest level in more than a month against the yen to 109.31 yen <JPY=> before edging back to 109.48 yen, down 1.9 percent on the day.
The euro was up 1 percent at $1.4725, after rallying more than 10 percent in 2007 <EUR=>. It hit an all-time high in November of $1.4968, according to the platform EBS.
The dollar fell 1.5 percent to 1.1163 Swiss francs <CHF=>. Sterling slipped 0.3 percent to $1.9803 <GBP=>.
Earlier, 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."
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.
Federal funds futures now completely reflect a quarter-percentage point cut in January.
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. 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.
Source: Reuters