Dollar slides as US business slows

The euro rose 0.7 per cent against the dollar to $1.3247 by late afternoon in New York after data from Chicago purchasing managers indicated that business activity in the Midwest unexpectedly fell last month.

Sterling rose to its highest level against the dollar since its ejection from the European Exchange Rate Mechanism in September 1992 as UK house prices continued to show rapid growth. The pound rose to $1.9699 before edging back to $1.9658, almost 1 per cent up on the day. The yen also gained, up 0.5 per cent against the dollar to Y115.77.

A report revealed that inflation in US personal consumption expenditure excluding food and energy, the Federal Reserve’s preferred inflation benchmark, held steady in October at 2.4 per cent year-on-year. Data suggested further inflation-fighting interest rate rises by the Fed, which could support the dollar, were even less likely to be needed.

The slide in the dollar was briefly arrested on Wednesday following an upward revision to official estimates of US third-quarter growth.

Michael Woolfolk, foreign exchange strategist at Bank of New York, said: “[The] personal income and spending report and Chicago PMI were the one-two punch that knocked the dollar back on the ropes, leaving little doubt over near-term direction in the beleaguered greenback.”

The Chicago purchasing managers’ index is regarded as a leading indicator of the national manufacturing index from the Institute for Supply Management, due today. The Chicago PMI index fell to 49.9 last month from 53.5 in October. Many economists had expected it to rise. The core personal consumption expenditure deflator, which excludes food and energy prices, rose 0.2 per cent, against a consensus forecast of 0.1 per cent.

Simon Hayley of Capital Economics said risk aversion could start playing a greater role in the dollar’s decline, as traders shied away from the carry trade, in which traders borrow cheaply in yen and buy higher-yielding currencies: “The risk of short-term dollar weakness may now be greatest against the yen.”

But Alan Ruskin, chief international strategist at RBS Greenwich Capital, said: “Ultimately the lesson from recent days and many other past events is that a weaker US dollar is highly unlikely to turn into a freefall [and] tends not to have a lasting negative impact on US asset markets,” he said.

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