NEW YORK (Reuters) - The dollar fell to a four-week low against the yen and a one-week trough versus the euro on Thursday, as investors fretted that weakness in both the U.S. manufacturing and service sectors signals a slowdown in the world’s largest economy.Expectations that the United States would continue to outperform other major economies and put pressure on the Federal Reserve to slow its interest rate cutting cycle were dampened this week after weak manufacturing and service sector surveys.
Data on Thursday showed that the Institute for Supply Management’s services sector index fell to 52.6 in September from 56.4 the previous month. Last month’s index was the lowest in three years amid rising concerns about tariffs.
The survey’s employment index also slid to 50.4 from 53.1 in August. September’s employment index was the weakest since February 2014.
The U.S. services data followed Tuesday’s U.S. manufacturing report, which presented a dire picture of the sector, with the ISM reading falling to its lowest in more than 10 years.
“It is clear the trend with most of the major U.S. data points are trending lower and it seems slowdown concerns have been confirmed,” said Edward Moya, senior market analyst at online FX broker OANDA in New York.
“While the service sector is still adding jobs, it is very apparent that we are no longer adding jobs at a strong pace and we will likely see further weakness in the service sector have a strong ripple effect in the coming months.”
In afternoon trading, the dollar was down 0.3% against the yen JPY=, at 106.88 yen, falling to its lowest level in four weeks at 106.49 right after the ISM non-manufacturing report.
The dollar index fell 0.2% to 98.86 .DXY, with the euro up 0.1% at $1.0969 EUR=. The euro rose to a one-week high of $1.0999 after the data.
Investors now await Friday’s employment report to confirm or quell recession worries.
Rate futures have factored in another 25 basis-point easing at the upcoming Federal Reserve policy meeting later this month following the manufacturing and services data weakness. Chances of a rate cut jumped to nearly 92.5% on Thursday from 77% on Wednesday.
“It’s increasingly difficult for the hawkish members of the Fed to argue that what we’re seeing is a transitory disruption in the survey data,” said Ranko Berich, head of market analysis at Monex Europe in London.
The dollar has broadly gained in recent weeks as investors added long positions on expectations that other major economies, led by Europe, will underperform the United States. The latest futures data shows long dollar bets at a 3-month high.
Graphic: USD and CFTC - here
Elsewhere, sterling rallied 0.6% against the dollar to $1.2365 GBP= after the head of a group of eurosceptic lawmakers in Prime Minister Boris Johnson's Conservative Party said on Thursday the government's latest Brexit proposals offered the possibility of a "tolerable deal."
Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis and Tom Brown