Dollar drops as data fuels uncertainty on Fed-ECB policy divergence

NEW YORK: The dollar fell on Tuesday as upbeat European economic data and a drop in U.S. manufacturing employment knocked the greenback from 8-1/2-month highs against a basket of major currencies.

The euro gained nearly half a percent against the dollar, bouncing back from a 7-1/2-month low. The strong euro zone data interrupted what has been a steady trend of dollar strength against the single currency.

It is still not clear what move the European Central Bank will make in terms of increasing monetary stimulus when it meets on Thursday.

The single currency fell 4 percent against the dollar in November on expectations that the ECB would add further stimulus to the euro zone at this week's meeting. In contrast, the U.S. Federal Reserve is expected to raise interest rates later in the month.

That divergent policy outlook pushed the euro to $1.05575 on Monday, its weakest since April and around a cent away from a 13-year trough of $1.0457.

The dollar index fell 0.3 percent on Tuesday to 99.88, after hitting a high of 100.26 on Monday.

But data showing unemployment in Germany hitting a record low and euro zone manufacturing growth at a 19-month high on Tuesday boosted the euro, which broke solidly through the $1.06 mark.

The dollar fell further versus the euro after U.S. manufacturing data showed the sector contracted in November, slowing for a fifth straight month and falling to its weakest levels since June 2009.

The euro rose 0.45 percent to $1.0611.

While the data helped fuel the euro's gains, pushing the single currency up an additional 20 basis points, analysts said it was unlikely to change the long-term trend of dollar strength and euro weakness.

"It's not a serious change in the underlying disposition of the euro, the dollar, the ECB and the Fed," said Joe Trevisani, chief market strategist at WorldWide Markets in Woodcliff Lake, New Jersey.

"This slightly - and I mean very slightly - increases the odds that the Fed will not begin to raise rates (at its meeting on Dec. 15-16). But it doesn't have any more effect than intraday position-taking."

Antipodean currencies also outperformed the greenback, with the Australian dollar rising 1.25 percent to the A$0.7315 .

The currency maintained firmness after the Reserve Bank of Australia (RBA) kept interest rates on hold, as expected.

The New Zealand dollar jumped 1.4 percent to a one-month high of $0.6675.