Hard landing fears hit dollar

Hard landing fears hit dollar
By Peter Garnham and Christopher Brown-Humes in London and Krishna Guha in Washington
Copyright The Financial Times Limited 2006
Published: December 1 2006 20:04 | Last updated: December 1 2006 21:41



The dollar fell further on Friday as weak US economic data heightened investor fears that the country’s economy could be heading for a hard landing.

The latest sell-off, which was particularly sharp against the euro and sterling, came after data suggested US manufacturing contracted for the first time in 3½ years in November.

The US currency fell as much as 0.8 per cent to a new 20-month low of $1.3348 against the euro and 1 per cent to $1.9847 against the pound, a new 14-year trough.

In afternoon trade in New York, the euro was worth $1.3322 and the pound $1.9798. During the week, the dollar lost 1.7 per cent against the euro and more than 2 per cent against sterling, taking its drop for the year to about 13 per cent and 15 per cent respectively.

The fall in the Institute for Supply Management’s factory index to 49.5 from 51.2 in October – a reading below 50 indicates that manufacturing is contracting – followed US data releases showing weakness in house prices and business activity.

Some economists said the ISM survey proves the slowdown is spreading from housing to other parts of the economy.

“Combined with other soft US data, the ISM data will reinforce fears of a hard landing and will add to the momentum behind the dollar sell-off,” said Martin Slaney at GFT Global Markets.

Ashraf Laidi of CMC Markets said: “Traders are going to be less cautious about selling the dollar against the euro and sterling going into next week.”

Private sector analysts have been predicting a 2.5 per cent rise in US gross domestic product in 2007. While there is no direct relationship between ISM data and GDP, James Knightley at ING Financial Markets said the ISM figures were consistent with growth slowing below 2 per cent.

Other economists, however, believe manufacturing is going through an inventory correction, and will recover next year. Ben Bernanke, Federal Reserve chairman, said this week he believed manufacturing remained in reasonably good shape.

The dollar’s fall helped push European shares down 2 per cent this week, while the S&P 500 index of leading US shares lost 0.3 per cent. But Federal Reserve have remained hawkish on interest rates.

Marc Chandler, currency strategist at Brown Brothers Harriman in New York, said the Fed and the market differed over the outlook for the US economy.