Service industry slowdown hurts euro

Service industry slowdown hurts euro

By Peter Garnham

Published: February 5 2008 10:31 | Last updated: February 5 2008 20:44

The euro fell sharply on Tuesday after a survey suggested activity in the eurozone service sector slowed markedly in January, prompting talk that the European Central Bank could scrap its hawkish rates stance.

The eurozone services purchasing managers’ index for January was revised down from 52.0 to 50.6, its weakest level since July 2003.

The readings for Germany, Italy and Spain plunged below the 50 level, which indicates contraction, with only France bucking the trend of the big economies.

“Given that the service sector in three of the biggest eurozone economies contracted at the start of the year, it greatly increases the already present downside risks to growth,” said Stuart Bennett at Calyon.

He said the data were likely to rattle the more dovish members of the ECB’s governing council ahead of Thursday’s decision on eurozone rates.

This, he said, could prompt Jean-Claude Trichet, ECB president, to tone down his hawkish rhetoric at the press conference following the decision.

By midday in New York, the euro had dropped 1.2 per cent to $1.4640 against the dollar, lost 0.8 per cent to £0.7455 against the pound and fallen 1 per cent to Y156.58 against the yen.

The dollar advanced in spite of a fall in the Institute for Supply Management’s index of activity in the US service sector. The index fell from 54.4 in December to 41.9 in January, its lowest level since October 2001.

Ashraf Laidi at CMC Markets said the report was the second important confirmation after last week’s dismal US employment report that the US economy was in recession. But the dollar remained little moved on the premise that the PMI data showed the eurozone was also slowing down.

Indeed, after failing to weaken significantly after weak US economic data in recent days, analysts said traders were forced to abandon bets against the greenback on Tuesday, sending it higher across the board.

The dollar rose 0.4 per cent to $1.9640 against the pound, gained 1.1 per cent to SFr1.1010 against the Swiss franc and rose 0.2 per cent to Y106.95 against the yen.

The Australian dollar fell 1.2 per cent to $0.8975 against the dollar after the Reserve Bank of Australia, as expected, raised interest rates 25 basis points to 7 per cent, citing concerns over the build-up of inflationary pressures in the economy.

Analysts said the central bank’s statement was not hawkish enough to justify expectations for a follow-up rate rise in March.

Some analysts said the rate rise could hurt the Australian dollar in the long term, since the RBA was not taking into account the effect of a US slowdown in the US on the country’s economy.

Clifford Bennett, chief economist at Sonray Capital Markets in Sydney, said it was an “extreme” move by the RBA, based solely on inflation data from last year.

“The Fed had a clear tightening bias right up to the point where it realised too late the wheels had started to fall off. Let’s hope the RBA is not making the same mistake,” he said.

“The RBA could, and should have waited for the global smoke to clear.”