Reuters: US Dollar Report: FOREX-Dollar jumps vs euro, yen after U.S. factory data

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FOREX-Dollar jumps vs euro, yen after U.S. factory data May 1st 2012, 16:37 Tue May 1, 2012 12:37pm EDT * U.S. ISM report turns things around for dollar * RBA surprises markets with 50 bps rate cut, Aussie tumbles * Yen hits 2-1/2-month high vs dollar, but falls By Gertrude Chavez-Dreyfuss NEW YORK, May 1 (Reuters) - The dollar rose from a one-month low against the euro and a 2-1/2-month trough versus the yen on Tuesday in thin trading, after a key U.S. manufacturing gauge showed factory activity unexpectedly picked up last month, offsetting recent weak economic reports. The Institute for Supply Management's factory data was one of the rare instances of positive U.S. economic news in recent weeks. Traders used the stronger-than-expected ISM manufacturing report to rebuild long dollar bets that had grown stale as the economy's outlook weakened. "The view on the economy has swung from optimism to pessimism of late and this could bring us back to the middle," said Nick Bennenbroek, head of FX strategy for North America at Wells Fargo in New York. "ISM suggests there's no real reason to get too concerned about the path of the U.S. economy at this point." ISM reported that its index of manufacturing activity rose to 54.8 in April from 53.4 in March, exceeding expectations for a reading of 53.0, and representing the strongest rate of growth in 10 months.. In midday New York trading, the euro fell 0.1 percent against the dollar to $1.3224 following the ISM data. Earlier, the euro had climbed to a four-week high at $1.3277. With many of Europe's trading centers closed for the May Day holiday, investors have shifted attention away from the underlying debt issues in Spain and Italy and focused on economic data instead. Light volumes were expected before Thursday's European Central Bank meeting, Friday's U.S. non-farm payrolls report and weekend elections in Greece and France. Traders said the euro's bias remained moderately bullish above $1.32. On Monday, it closed well above $1.32 after six days of trying to end above that key level, which in and of itself is a positive signal. But still, recent price action has been very indecisive. A break of $1.3385 is needed to confirm the bullish outlook, traders said. Market participants also reported investor buying of topside protection in euro/dollar, with option strikes as high as the mid-$1.40s. Against the yen, the dollar recovered from a more than two-month low, rising to session highs at 80.29 yen. It was last at 80.21 yen, up 0.5 percent. With many in the market still holding short yen positions built up as Japan eased monetary policy this year, traders and strategists saw potential for declines from the year's highs above 84 yen. Front-end volatility in dollar/yen remained under pressure despite the dollar hitting multi-month lows. On Tuesday, one- month volatility was at 8.35 percent, falling as low as 7.76. Volatility curves in dollar/yen, however, are positively sloping, with back-month options still higher than short-dated ones - usually reflecting expectations of some stress. Ultimately, however, analysts said long-end volatility should decline as well because it has become expensive for investors to be on such a constant state of alert, given time decay. The Australian dollar, meanwhile, was the day's biggest mover, falling sharply after the Reserve Bank of Australia slashed rates by a deeper-than-expected 50 basis points. The Aussie fell 0.8 percent to US$1.0340 and slid to a three-month low near 82 yen. Markets had been caught flat-footed by the RBA move, as markets had been expecting just a 25-basis-point rate cut. The Aussie traded near a five-month low against sterling, which rose above A$1.5700 despite a weaker-than-expected survey of the UK manufacturing sector that pushed the British currency down against the U.S. dollar. "The RBA move means we no longer see a cut in June, but data in the coming months will be of particular focus in the wake of this rather unprecedented cut," TD Securities said in a research note. "We are now calling for another 25-basis-point cut in Q3." Link this Share this Digg this Email Reprints

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