Dollar slides ahead of Fed, China data hit oil

LONDON Wed May 1, 2013 4:02pm IST

Tokyo Stock Exchange (TSE) employees work at the bourse at TSE in Tokyo April 24, 2013. REUTERS/Yuya Shino

Tokyo Stock Exchange (TSE) employees work at the bourse at TSE in Tokyo April 24, 2013.

Credit: Reuters/Yuya Shino

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LONDON (Reuters) - The dollar edged to a two-month low on Wednesday as investors awaited the outcome of the U.S. Federal Reserve's policy meeting later and brighter-than-expected UK manufacturing data pushed sterling to a 2-1/2 month high.

The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) rose to 49.8 in April from an upwardly revised 48.6 in March, putting the sector within a whisker of the 50 line that separates growth from contraction.

Economists had expected a much weaker reading of 48.5 and the first rise in the new orders component of the survey since January instilled a tone of optimism into markets.

Sterling rose to a new 2-1/2 month high against the dollar of $1.5591, UK gilts fell and London's FTSE 100, the only of Europe's major stock markets not closed for Labour Day, climbed 0.4 percent to move back towards its recent 4-1/2 year high.

Unlike the U.S., China and the euro zone, UK PMI's are the only ones currently heading upwards. Economists remain decidedly cautious about the country's near term outlook, however, with sluggish internal growth and a battle to bring down debt levels weighing on the economy.

"It's a relatively decent result," said Investec economist Philip Shaw. "The manufacturing sector is still weak - the PMI remains below the 50 break even level - but there is some semblance of stabilisation, which could imply a gentle building of recovery momentum across the economy."

CENTRAL BANKS

Wider market attention remained largely on central bank actions though. The Federal Reserve will announce the outcome of its latest meeting at 1800 GMT, while the European Central Bank is expected to cut its interest rates to a new record low of 0.5 percent on Thursday.

The dollar .DXY was on the back foot ahead of the Fed statement and dipped to new two-month low of 81.596 against a basket of six major currencies as sterling moved upwards. <FRX/>

U.S. stock index futures also signalled that the recent rally on Wall Street, which sent the S&P 500 index .SPX to its latest record high on Tuesday, was likely to continue though much will depend on the noises coming from the Fed. .N

The central bank is widely expected to maintain its monthly purchases of $85 billion in bonds when the two-day meeting wraps up as it looks to support an economic recovery that is nearly four years old but still too weak for the job market to truly heal.

With the central bank's favoured inflation gauge slipping and employment growth faltering, Fed officials could again find themselves in the uncomfortable position of having to shift from talk of curbing stimulus to the possibility of doing more.

The ECB is also expected to cut rates when it meets in the Slovak capital Bratislava on Thursday but economists are eyeing whether it can do more.

It lacks the aggressive policies many of is major advanced economy peers are now using and the mismatch in approaches was keeping upward pressure on the euro as midday approached.

By 1000 GMT it was up 0.2 percent at $1.3192 and looking at the prospect of a new 2-1/2 month high.

"We think meaningful EUR moves will be driven by three fairly unrelated factors, none of which relates to monetary policy in the eurozone," Barclays Capital said in a research note, referring to the effect of a weak yen on Germany's growth, the likely impact from the new Italian coalition government's austerity policies, and a recovery in the U.S. economy.

CHINA DISAPPOINTMENT

In Asia, the highlight of the session was China's official purchasing managers' index (PMI) data for April.

Growth in China's manufacturing sector unexpectedly slowed in April to 50.6 from an 11-month high of 50.9 in March as new export orders fell, raising fresh doubts about the strength of the economy after a disappointing first quarter.

Many of the region's bourses were closed for Golden Week public holidays but the disappointment from the data was evident across risk assets.

The Australian dollar, highly sensitive to data from China, Australia's biggest trading partner, hit a session low of $1.0345, oil fell back below $102 a barrel and copper dropped more than 1.5 percent as it slid under $7,000 a tonne again.

"If we are right, the market should further lower growth expectations (for China) and prepare for years of uncomfortable economic policy as the new leadership strives to achieve a relatively painless rebalancing," economists at Societe Generale said in a note to clients.

(Reporting by Marc Jones; Editing by Giles Elgood)

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