NEW YORK: The dollar slid against a broad swath of currencies on Monday as weak US manufacturing data raised concerns about the world's largest economy and lowered expectations that the Federal Reserve will rein in its bond purchases anytime soon.
Investors pared lofty positions in the greenback after data showed output at US factories declined in May for the first time in six months. Manufacturers in China and Europe also struggled last month as demand fell, suggesting the global economy still requires support from global central banks.
"The main reason for today's dollar weakness was the weaker- than-expected data, especially the ISM manufacturing," said Charles St-Arnaud, foreign exchange strategist at Nomura Securities in New York.
"We continue to expect the current weakness to be temporary, as we believe that the US economy should pick up in the near future as should better economic data, and this should be supportive of the dollar," he said.
The dollar has recently been buoyed by expectations the Federal Reserve could reduce its $85-billion-per-month stimulus program. The Fed's bond buying program, which is tantamount to printing money, has pressured the US currency since it was launched in the midst of the global financial crisis.
Investors are anxiously awaiting US May employment report due on Friday, with Wall Street analysts expecting job gains of 170,000 and an unemployment rate of 7.5 percent.
Deutsche Bank's Alan Ruskin, head of G-10 foreign exchange strategy said if the US non-farm payrolls report is strong, the poor ISM data would be easily forgotten and the dollar would rally again.
The dollar index, which tracks the greenback against a basket of currencies, was down 0.84 percent at 82.672.
"Over the last few weeks the dollar has been trading more like a growth currency than a safe haven, so today's data had people rethinking whether the Fed will taper its monthly bond purchases," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.
"Having said that, the dollar was long overdue for a pullback, especially with long positioning in dollar/yen so high," he said.
Positioning data on Friday showed currency speculators had continued to add bets on further dollar strength, with contracts at their highest since at least June 2008.
The dollar fell below 100 yen, hitting as low as 98.86 yen, its lowest since May 9. The dollar last traded at 99.48 yen, down 1.0 percent on the day.
The greenback slightly pared losses versus the yen after news of a Japanese policy shift. Japan's government is set to urge the nation's public pension funds - a pool of over $2 trillion - to increase their investment in equities and overseas assets as part of a growth strategy being readied by Prime Minister Shinzo Abe.
"While the (ISM) data for now constrains the thoughts of QE (quantitative easing) tapering, this data is weak enough that it will also raise broader questions on global growth," said Ruskin at Deutsche Bank in New York.
Ruskin noted, however, that although the ISM report confirms that the manufacturing sector is soft, "it says little about the wider economy that has looked stronger than the manufacturing numbers."
GOOD DOLLAR SHOWING IN MAY
Investors took profits on the dollar after a good run in May in which it gained nearly 2 percent against a basket of currencies, its second-best monthly performance so far this year. The dollar also posted a monthly gain of more than 3 percent versus the yen.
Dollar weakness was further exacerbated by a firmer euro as the euro zone's manufacturing sector showed signs of stabilizing.
The euro was last up 0.6 percent against the dollar at $1.3072, having reached a session high of $1.3107.
The next focus is Thursday's European Central Bank rate decision. Market participants are weighing the possibility of another interest rate cut, either in the benchmark refinancing rate or a move to take the deposit rate negative. Both moves could drag the euro lower.
The dollar also fell 0.8 percent to 0.9470 Swiss franc while the Australian and New Zealand dollars both traded 1.9 percent higher versus the US currency.
"Higher yielding currencies, such as the Aussie and Kiwi, are benefiting from expectations that global central banks will remain supportive, allowing these currencies to maintain their yield advantage," Commonwealth's Esiner said.
<Center><b><i>Copyright Reuters, 2013</b></i><br></center>
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