The single currency tumbled against the dollar and the Japanese yen after the release of Europe's PMI service data, raising concern that Jean-Claude Trichet's reluctance to cut interest rates will hamper growth.
The eurozone services index dropped to 50.6 (forecast was 52.0), the lowest since July 2003, from 53.1 in December. Economists expect the ECB will hold borrowing costs at 4% on Feb. 7. Interest-rate futures show the implied rate on the June Euribor contract fell to 3.91% on Tuesday, from 4.03% the previous day. Euro fell sharply versus the dollar and the Japanese yen from 1.4835 to 1.4822 and from 158.53 to 156.19 respectively.
The Japanese yen rose against most major currencies and pared its loss versus the dollar after the release of U.S. ISM non-manufacturing data which fell unexpectedly to 41.9 in January, the lowest since October 2001, from 54.4 the prior month. The data below 50.0 level suggested the service industries contracted in January. The greenback fell from 107.75 to 106.65 versus the Japanese yen after the weak U.S. economic data..
Fed funds futures traded on the Chicago Board of Trade showed 88% odds the U.S. central bank will cut interest rate by 50 basis points to 2.5% on March 18 from 3.0%. The chance of a reduction to 2.25% is 12 %. Richmond Fed President Jeffrey Lacker said the struggling U. S. economy may need more interest rate cuts to avoid a recession. Merrill Lynch said the extraordinarily weak reading in the ISM non-manufacturing index will keep the Federal Reserve in aggressive rate-cutting mode 'with a strong chance of an inter-meeting move possible'.
The Australian dollar tumbled against the U.S. currency from 0.9092 to 0.8942 although the Reserve Bank of Australia raised borrowing costs by 25 basis points as expected to an 11-year high of 7%. Policy makers said in a statement that ‘significant slowing in demand’ is needed to cool inflation, while global growth is likely to ‘be below trend in 2008’. New Zealand dollar also fell sharply from 0.7947 to 0.7782 versus the U.S. currency.
U.S. Treasury Secretary Henry Paulson on Tuesday urged Chinese authorities to let their currency appreciate faster. China's yuan has appreciated 3.8% in the past three months, the fastest pace since it ended a link with the U.S. currency in July 2005. The currency touched 7.1817 per dollar on Jan. 31, the strongest level since the link was ended.
Wednesday will see the release of U.K. Nationwide consumer confidence, Japan’s leading indicators, U.S. productivity and labour cost and U.K. leading indicators.