FOREX-Dollar slips as market eyes U.S. factory data
reuters.com Mon March 3, 2003 01:02 PM ET (Adds U.S. manufacturing data, updates prices, comments)
By Andrea Ricci
NEW YORK, March 3 (Reuters) - The dollar eased on Monday as listless U.S. manufacturing data encouraged selling of the U.S. currency, but dealers said they expected it to remain in well-established ranges absent major developments in Iraq.
"Manufacturing is still growing, but it's a real wait-and-see situation. There's a lot of geopolitical risk, not just in Iraq, but with oil prices up from the strike in Venezuela and North Korea not helping," said Kurt Karl, chief economist at Swiss Re America in New York.
By midday in New York, the dollar was down about a third of a percent against the euro at $1.0828 per euro and off four tenths of a percent against the Swiss franc at 1.3467 francs .
Joe Francomano, vice president of foreign exchange at Erste Bank in New York, said the uncertainty over what will happen in Iraq, and how that will affect the U.S. economy, was keeping pressure on the dollar.
"People seem to be writing off the first half of the year, whether it's because of the mixed U.S. economic data, high oil prices or worry over Iraq. Other than the housing market, we're not seeing much sign of growth," he said.
"It's tough to make gains in market conditions like that, and obviously we are seeing confidence in the dollar erode," Francomano added.
A key survey on manufacturing in the United States showed the manufacturing sector expanded for a fourth straight month but at a slower-than-expected pace.
The Institute for Supply Management said its February index slipped to 50.5 in February from 53.9 a month earlier, below expectations of a dip to 52.4. It said concerns about a possible war with Iraq were a "major deterrent" for many industries.
Against the Japanese currency, the dollar eased 0.23 percent to 117.85 yen .
Dealers said they were reluctant to sell the dollar aggressively against the yen after Japan disclosed last week that it had intervened in February for a second straight month to weaken its currency.
IRAQ THE KEY
The weak U.S. factory data also put pressure on U.S. stocks, which had opened higher on speculation that recent events may have pushed back a possible war on Iraq.
Baghdad agreed over the weekend to destroy banned missiles and on Monday said it would submit a report on its stocks of biological weapons.
Turkey's parliament over the weekend blocked a U.S. plan to use the country as a base for a possible attack on Iraq, though on Monday the two parties said they were reviewing other options.
Equity investors also were cheered by news that a key member of the al Qaeda network had been captured in Pakistan, an arrest U.S. officials said was significant in the war on terror.
Oil and gold prices also were lower on easing war worries.
But currency dealers were more cautious, with some reading Turkey's surprise rejection of U.S. troops as a further blow to White House efforts at coalition building, and therefore a negative for the dollar.
The worst-case scenario for the dollar would be for the United States to wage war on Iraq with limited international backing.
"The dollar has been range trading, and will continue to do, probably with a weaker bias, until we some resolution on the Iraq issue," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.
CENTRAL BANK MEETINGS AWAITED
The dollar showed little reaction to an unexpected 0.1 percent fall in U.S. consumer spending, long a mainstay of the economic recovery. Economists had expected a 0.1 percent rise.
It also shrugged off a bigger-than-expected 1.7 percent rise in construction spending in January.
Data from Europe were mixed.
Switzerland's industrial sector contracted further, with a key purchasing management index falling to 48 in February from 48.3 in January, the eighth time in nine months that the index has been below the boom-or-bust line of 50.
But manufacturing in the euro zone stabilized in February. The Reuters Eurozone Purchasing Managers' Index rose to 50.1 last month from 49.3 in January, beating consensus forecasts.
Nevertheless, analysts said the survey was unlikely to stop the European Central Bank cutting interest rates this week to shore up business and consumer confidence.
A Reuters poll taken last week found that 38 of 53 economists expect the ECB to cut rates this week.
Erste Bank's Francomano, echoing a sentiment expressed by other traders, said an ECB rate cut would erode the euro's yield advantage, "which may favor the dollar."
Central banks of Japan, Britain, Australia, New Zealand, Canada and Norway also hold policy meetings this week.
Norway is widely expected to cut rates and economists believe there is some chance that Canada will raise rates. But the other banks are expected to keep interest rates on hold.