FOREX-Dollar slides on private sector activity contraction

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The dollar pulled back from a new two-decade high against the euro on Tuesday after a report showed U.S. private sector activity contracted for a second consecutive month in August, which increases the chances that the Federal Reserve will ease its rate hike cycle. The S&P Global Flash Composite Purchasing Managers Index (PMI) for August fell to 45 this month, the lowest since February 2021, as demand for services and manufacturing weakened in the face of the inflation and tighter financial conditions. A reading below 50 indicates a contraction in activity.

Falling demand was exactly what the Fed was trying to achieve with its most severe series of interest rate hikes since the 1980s. The Fed raised rates from near zero in March to their current range of 2 .25% to 2.50%, with more expected in the coming months as it attempts to rein in inflation, which is near a 40-year high. “The manufacturing and services PMI is well below expectations, raising concerns about the strength of this economy and supporting the narrative that Fed Chairman Powell may be more inclined to provide this pivot and slow the pace of tightening,” said Ed Moya, senior market analyst at Oanda.

Against a basket of six major currencies, the dollar index fell 0.523% to 108.42 at 10:45 a.m. Eastern time (1445 GMT), after earlier hitting its highest level since mid-July. The euro rose 0.35% against the greenback at $0.9977, after hitting a new two-decade low of $0.99005 earlier in the session on renewed fears that a shock energy is keeping inflation high, making a recession in Europe almost certain.

Data showed business activity in Europe contracted less than expected in August, although the outlook was still bleak. “Renewed concerns about Europe following soaring gas prices are the main reason for the euro’s decline,” said Holger Schmieding, chief economist at Berenberg.

British and Dutch wholesale gas prices rose sharply on Monday as the prospect of servicing Russia’s main gas pipeline to Europe sent markets on edge. Russia will cut off natural gas supplies to Europe via the Nord Stream 1 gas pipeline for three days at the end of the month, the latest reminder of the precarious state of the continent’s energy supply.

Heat waves on the continent have already put a strain on energy supplies and concerns are growing that any disruption during the winter months could be devastating to business activity. All of this has hurt the euro, which is down more than 12% so far this year, and lost nearly 3% in August.

Meanwhile, the Chinese Yuan weakened to a two-year low and the British Pound briefly touched its lowest level since March 2020. The British Pound recovered some ground after the PMI data and rose 0, 56% against the greenback, after touching $1.1718 earlier in the day.

The Chinese yuan fell to a near two-year low of 6.8499 to the dollar as Beijing’s moves to ease policies aimed at reviving faltering growth and the Federal Reserve’s relentless tightening streak kept the pressure on the Chinese currency.

(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)

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