By Myra P. Saefong and William L. Watts, MarketWatch
SAN FRANCISCO (MarketWatch) — The U.S. dollar traded slightly higher versus most major rivals Tuesday, after data showed a contraction in U.S. manufacturing activity in August, while the euro edged lower as currency traders awaited further details of the European Central Bank’s bond-buying plans.
The ICE dollar index DXY +0.10% , which measures the unit against a basket of six major currencies, was at 81.311, compared with 81.208 late Monday in North American trading, when U.S. markets were closed for the Labor Day holiday. It was around 81.300 before the ISM data, initially pared gains after the data, then recovered.
The WSJ dollar index XX:BUXX +0.15% , which measures the currency against a slightly larger basket, rose to 70.88 from a previous close of 70.80.
Activity for the nation’s manufacturers showed contraction for the third straight month in August, the Institute for Supply Management reported Tuesday. The ISM index fell slightly to 49.6% in August from 49.8% in July. See story on ISM.
The consensus forecast of estimates collected by MarketWatch was for the index to rise to 50.2%.
“The ISM weakness was not enough to drum up a big wave of equity selling, which would have boosted the dollar more,” said Richard Hastings, a macro strategist at Global Hunter Securities. “Instead, we have a quiet move in the dollar which seems a continuation of the focus Europe.”
The S&P 500 Index SPX -0.59% extended losses after the ISM data, falling 0.5%.
“In the near-term, we see the dollar Index testing the 81.000 support level, with risks of further selling into the 79 handle if the ECB begins a round of direct bond purchases,” he said.
The euro EURUSD -0.23% traded at $1.2571, down slightly from $1.2595 Monday. It bought $1.2574 shortly before the ISM data.
The euro rose in earlier activity to touch a high of $1.2628, as Spanish and Italian yield curves steepened sharply, fueled by leaked remarks from ECB President Mario Draghi’s closed-door testimony before a European Parliament committee late Monday. Read more on Draghi, Spanish bond yields. .
Draghi reportedly told the panel that the ECB could buy bonds with maturities as long as three years without violating the central bank’s mandate. Investors are looking for more details of the ECB’s bond-buying intentions when Draghi holds his monthly news conference on Thursday, following a meeting of the ECB Governing Council.
“Irrespective of textbook arguments about the likely [consequences] on the currency of the ECB’s policy direction, the euro is likely to find near-term support from any action from the ECB,” said Jane Foley, senior currency strategist at Rabobank in London.
The ECB’s December and February long-term refinancing operations clearly boosted risk appetite in currency markets over the first four months of the year, with the safe-haven yen and U.S. dollar the weakest performing G-10 currencies through late April, she noted.
“That said, recent gains in the euro and the weaker tone of the dollar, which has stemmed from anticipation that the Fed will soon act, suggest that there is scope for a ‘sell-on-the-fact’ reaction in euro/U.S. dollar this month. Much more powerful downside risks in euro/U.S. dollar are possible if either the ECB or the Fed disappoint,” Foley said.
The Australian dollar AUDUSD -0.13% traded at $1.0231, down 0.1%. The Reserve Bank of Australia on Tuesday kept its benchmark cash rate on hold at 3.5%, as was widely expected.
The British pound GBPUSD +0.01% traded at $1.5896, from $1.5880 Monday.
The dollar USDJPY +0.12% bought 78.36 Japanese yen, versus at ¥78.38.
Myra Saefong is a MarketWatch reporter based in San Francisco.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
