US dollar on defensive after manufacturing disappoints ahead of jobs data

[TOKYO] The US dollar was on the back foot on Friday after taking a tumble following a surprise contraction in US manufacturing in August, casting some doubts on the strength of US economic growth ahead of the closely-watched employment data due later in the day.

The Institute for Supply Management (ISM) said its index of national factory activity fell 3.2 percentage points to a reading of 49.4, the first contraction since February.

The result was a setback for US dollar bulls, who had bet solid US data this week would cement the case for an early rate hike by the Federal Reserve.

The euro rose to US$1.1195, having extended gains from Wednesday's three-week low of US$1.1123.

Its next target is seen around US$1.1215, where it has its 100-day moving average as well as 38.2 per cent retracement of the decline from its Aug 18 peak of US$1.1366.

The US dollar slipped to 103.21 yen after having climbed to as high as 104.00 yen, its highest level in over a month.

The US dollar index slipped to 95.669, though it is still above its low so far this week of 95.479, with its fate seen hinging on the looming jobs data.

Employers are expected to have added 180,000 jobs in August, according to the median estimate of 91 economists polled by Reuters.

A stronger reading could fan expectations of a near-term rate hike though US Fed Funds rate futures are only pricing in just over 20 per cent chance of a tightening at the Fed's next meeting on Sept 21-22, despite recent comments from Fed officials suggesting a hike was imminent.

Cleveland Fed President Loretta Mester, a voting member on the Fed's policy-setting committee this year, was the latest to join the chorus on Thursday, saying the US labour market is at full strength and the Fed needs to be on a path of gradual interest rate increases.

"The Fed could have raised rates already if it is just focusing on the employment and wages. They will try to gauge until the last minute whether financial markets can withstand a rate hike," said Makoto Noji, senior strategist at SMBC Nikko Securities.

Elsewhere, the British pound jumped to a one-month high of US$1.3318 on Thursday and was last at US$1.3271 after data showed the British manufacturing sector staged one of its sharpest rebounds on record in August.

The Markit/CIPS Purchasing Managers' Index (PMI), a closely watched gauge of factory activity, jumped to a 10-month high of 53.3 in August, recovering from the three-year low it hit in July after Britain's June 23 vote to leave the European Union.

The surprise strength could prompt the Bank of England to rethink the need to cut interest rates again if other surveys confirm the trend.

Sterling also hit one-month highs of 83.885 pence per euro and 138 yen.

REUTERS