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Dollar may weaken on concern US manufacturing failed to grow

The dollar may decline against the euro on speculation a US report today will show manufacturing failed to grow in December.

The US currency may drop for a sixth day on prospects slowing growth will prompt the Federal Reserve to lower interest rates. A German report today may show unemployment fell last month, backing the case for the European Central Bank to raise borrowing costs as soon as next week. The yield gap between 10-year US and German debt narrowed to the least in almost a week. „The fact the Fed is not going to hike again contrasts starkly with the ECB, whereby it looks like it could hike rates as early as January 11,” said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney.
„The interest-rate spread will move in the euro's favor. That's going to be rather bearish for the dollar.” The dollar traded at $1.3275 per euro at 8 a.m. in Singapore from $1.3272 in New York late yesterday. It was also at 118.82 yen from 118.85. It may fall to $1.3300 per euro and 118.60 yen today, Trinh said. Movements may be exaggerated as trading will be less than usual today because financial markets in Japan are closed for a public holiday, Trinh added.The yield premium investors earn on benchmark 10-year Treasuries over similar-maturity German bunds was at 0.7452 percentage point today, the lowest since December 28.

The Institute for Supply Management will probably say at 10:00 a.m. today that US manufacturing didn't expand last month, after contracting for the first time since April 2003. Its December factory index will show a reading of 50, the dividing line between contraction and expansion, compared with 49.5 in November, according to a Bloomberg News survey of economists. Germany's unemployment dropped to 10.1% in December, the lowest in more than four years, according to the median estimate of 22 economists.
The Nuremberg-based Federal Labor Agency releases the data at 9:55 a.m. today. The euro last year had the fourth-best performance against both the dollar and the yen among the 17 most active currencies tracked by Bloomberg. The euro, shared by 13 countries in the region since Slovenia adopted it January 1, gained 11.4% versus the dollar and 12.6% against the yen.
The Fed has kept its overnight lending rate at 5.25% at its past four meetings, ending a two-year cycle of increases. Interest-rate futures indicate the odds of a quarter-percentage-point rate cut by March were 17% yesterday, up from 11% on December 15. By contrast, the ECB increased borrowing costs six times since December 2005, to 3.50%, and is scheduled to next meet on interest rates on January 11. (Bloomberg)