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Dollar header for biggest two day decline Original Source Link: (May no longer be active)
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Dollar Declines as U.S. Factory Index Suggests Slower Growth
Sept. 1 (Bloomberg) -- The dollar headed for its biggest two-day decline versus the euro since mid-July after the Institute for Supply Management's index of U.S. manufacturing fell last month.
Record oil prices and destruction from Hurricane Katrina caused traders to increase bets the Federal Reserve will only raise interest rates one more time this year. President George W. Bush will meet with Fed Chairman Alan Greenspan today, the White House said. A widening rate gap between the Fed and the European Central Bank has driven the dollar up 8.9 percent this year.
``It's the worst of all worlds,'' said Andrew Busch, currency strategist in Chicago at Harris Nesbitt Corp., a unit of Canada's fourth-largest bank by assets. ``Clearly there's been a deceleration of the manufacturing sector. That's hurting the dollar, bottom line.''
Against the euro, the dollar traded at $1.2448, the weakest since Aug. 12, at 12:11 p.m. in New York, from $1.2346 late yesterday, according to electronic currency dealing system EBS. It has dropped more than 2 percent in the past two days. The dollar fell to 110.07 yen, from 110.61, and was lower against all 16 most active currencies except the Brazilian real.
The ISM's manufacturing index was 53.6 in August, compared with 56.6 in July and the 57 reading that was the median estimate in a Bloomberg News survey of economists. Readings above 50 indicate growth.
``The market is focused on the hurricane and worrying that this is the exogenous event that tips the U.S. economy into much slower growth,'' said Busch.
Dollar Forecast Cut
UBS AG today lowered its forecasts for the dollar versus the euro and the yen. The firm now expects the dollar to decline to $1.27 per euro in one month and $1.29 in three months, compared to its previous forecasts of $1.23 and $1.25. UBS forecasts the dollar will trade at 108 yen in one month, down from 110.
``We are concerned that financial markets aren't pricing in the risk that higher oil prices hurt the U.S. economy,'' said Mansoor Mohi-uddin, head of currency strategy in London at UBS. ``That would be detrimental to the dollar.''
The dollar dropped 1 percent against the euro and 0.6 percent versus the yen yesterday after the National Association of Purchasing Management-Chicago said its gauge of regional manufacturing fell the most on record. The index declined to 49.2 from 63.5 in July, compared with the median forecast of 61.
``The perception is there's been a change in the outlook for Fed policy,'' said Michael Malpede, senior foreign exchange analyst in Chicago at futures broker Refco Group Ltd. ``The Fed may be forced to'' pause in its rate increases, he said.
Slower GDP
A separate government report yesterday showed the U.S. economy grew less than previously estimated in the second quarter. Gross domestic product increased at a 3.3 percent annual rate, less than the previous calculation of 3.4 percent.
``The Fed is closer to moving to a pause in monetary policy,'' said Paresh Upadhyaya, a currency portfolio manager in a group that oversees $29 billion at Putnam Investments in Boston. ``We've turned more bearish on the dollar.'' He said the firm has been buying euros over the past week.
Fed policy makers have raised their benchmark rate 10 times since June 2004, to 3.5 percent.
Rate Futures
Interest-rate futures show the central bank may only lift its target rate to 3.75 percent from 3.50 percent. December federal funds futures, bets on what the central bank's target rate will average in that month, yielded 3.82 percent, down from 4.08 percent at the beginning of the week.
Anthony Santomero, president of the Fed Bank of Philadelphia, said yesterday that the U.S. economy can withstand higher oil prices and the after effects of the hurricane.
Santomero said in a speech to a business group in Philadelphia that ``it is likely that we can continue'' to raise interest rates ``at what we have described as a measured pace.'' Santomero votes on interest rates at the Fed this year.
A report tomorrow from the U.S. Labor Department may show the economy added jobs above the average of the past two years. Employment rose 190,000 in August after 207,000 jobs were created a month earlier, according to the median estimate of 70 economists surveyed by Bloomberg.
The euro remained stronger after the European Central Bank lefts its target interest rate unchanged at 2 percent, where it has stood since June 2003. The decision was expected by all 36 economists surveyed by Bloomberg News.
``Although upside risks to price stability exist, we continue to see no evidence of a buildup of underlying inflation in the euro area,'' ECB President Jean-Claude Trichet said at a press conference after the announcement. ``Vigilance with regard to upside risks is warranted.''
Last Updated: September 1, 2005 12:35 EDT
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