The dollar rose against the euro and the pound Wednesday, the first trading day of the new year, even as the key index of the U.S. economy's manufacturing strength showed the sector contracted last month after 10 straight months of growth.
The U.S.-based Institute for Supply Management, a private research group, said its manufacturing index registered 47.7 percent last month, down over 3 percentage points from the 50.8 recorded in November. A reading above 50 indicates growth; below that spells contraction. That was slightly weaker than the 50.9 expected by analysts polled by Thomson/IFR Markets.
The 15-nation euro, which expanded to include Malta and Cyprus on Jan. 1, bought $1.4646 in midafternoon European trading, slightly below the $1.4682 it bought on Dec. 31 in New York, and well off its all-time high of $1.4967 set on Nov. 23. Most markets were closed Jan. 1, a holiday in the U.S. and across the euro zone.
The British pound fell to $1.9791 from $2.0029 on Monday, while the dollar slipped to 111.07 Japanese yen from 111.54 on Dec. 31.
The dollar has been buffeted by worries over the health of the U.S. economy and three interest rate cuts by the U.S. Federal Reserve, which is trying to reduce borrowing costs to revive the nation's battered housing market. Investors think another rate cut may be on the way and could glean hints about such a move when the Fed releases the minutes from its last meeting.
"There's certainly a consensus that the U.S. economy will be in for a rough ride through the early part of 2008, but whether we'll see a recession remains to be seen," said James Hughes, of CMC Markets in London.
Lower interest rates can jump-start a country's economy, but may weigh on the currency as traders look to invest in higher-yielding assets.
Similarly, the rise of the euro has led to consternation by some politicians, notably in France, where President Nicolas Sarkozy has said it makes it harder for European exporters like plane builder Airbus to be competitive.
But in an editorial published in daily newspaper Le Monde, French Minister for European Affairs Jean-Pierre said the euro's rise has helped protect consumers.
"We don't say it often enough, the appreciation of the euro doesn't just have negative effects. It protects that purchasing power of Europeans in the face of rising raw materials prices."