Fears of a global downturn will provide some US dollar protection even with the dreadful US PMI data on Tuesday.

The Euro fell sharply to lows around 1.4620 on Tuesday, the largest daily fall of the year as confidence weakened, although a key feature was increased global fears. The dollar strengthened to highs just beyond 1.46 on Wednesday before some consolidation after the sharp gains.

The US PMI index for the services sector fell very sharply to 41.9 in January from 54.4 the previous month while the new composite index also fell substantially. An index around this level is consistent with recession conditions which will revive fears that the US economy is weakening sharply with a high risk of negative first-quarter growth.

The data is a negative dollar factor and will invite speculation over another emergency Fed interest rate cut. The US currency will secure further protection from fears that the damage is spreading to Europe while there is also the potential for capital repatriation back to the US.