GLOBAL MARKETS-U.S. growth worries send dollar lower

Tue May 1, 2012 7:54am EDT

* Dollar weakens on worries over slower U.S. growth

* World shares softer but May Day holiday to keeps trading thin

* Improved Chinese PMI counters fears of weaker global economy

By Richard Hubbard

LONDON, May 1 (Reuters) - World shares eased and the dollar hit a two-month low against the Japanese yen on Tuesday, after signs of recovery in China's vast factory sector failed to offset worries about the health of the U.S. economy and the euro zone crisis.

But activity was limited with many markets in Asia and Europe closed for the May Day holiday.

U.S. stocks were poised to start the day mixed before data on the pace of growth in the U.S. manufacturing sector, with any sign of a weakening in momentum likely to increase talk of further monetary easing by the Federal Reserve.

However, many analysts expect the data to reinforce expectations that U.S. interest rates will remain on hold for some time. "With the economy still growing above two percent, calls for further quantitative easing (QE) will likely fall on deaf ears, at least for now," said Bill O'Neill, chief investment officer EMEA at Merrill Lynch Wealth Management.

The latest signs of weakening momentum in U.S. growth, which came from a sharp fall in business activity in the Midwest, saw the dollar hit a two-month low versus a basket of currencies on Tuesday at 78.622.

Against the yen, the dollar fell to a low of 79.64, its weakest point since Feb. 21, while the stronger yen hit Japan's export-related equities, sending the Nikkei index to a 2-1/2 month closing low.

The MSCI's world equity index was down just 0.14 percent to 328.20, adding to losses of about 1.5 percent in April.

"In general, stock markets and risk assets seem to be extremely resilient in the face of the news flow which has undoubtedly been (of a) more negative nature," James Ferguson, strategist at Westhouse Securities, said.

ECONOMIC CLOUDS

Worries about the health of the global economy have resurfaced since last week's initial releases of U.S. and British first-quarter economic output figures disappointed the market.

Business sentiment surveys and data across the euro zone have also pointed to a worsening outlook as government austerity measures bite. On Monday Spain officially joined the list of European nations in recession.

Weakness in the euro zone was cited as a major factor in a dip in Britain's manufacturing activity in April, seen in the latest Manufacturing Purchasing Managers' Index (PMI), a leading indicator of economic activity, published on Tuesday.

The UK PMI dropped to 50.5 in April from a downwardly revised 51.9 in March, keeping the sector just above the 50 level which separates growth from contraction.

"The UK is really succumbing to the weakness in its key export market, the euro zone," said Rob Dobson, senior economist at Markit, which compiles the PMI survey.

Over the past 24 hours, Australia and Canada, whose economies are closely linked to demand in the global economy, have both added to the concerns.

The Reserve Bank of Australia cut its official interest rates by a surprisingly aggressive half percentage point to 3.75 percent, due to sluggish economic growth and lower than expected inflation..

The announcement sent the local dollar down more than 1 percent to $1.0312 and to a three-month low near 82 yen. Domestic government bond yields fell to 60-year lows.

Canada said its economic output dropped by 0.2 percent in February from January, surprising analysts who had expected a 0.2 percent increase and dampening speculation the Bank of Canada was preparing to shift to a tighter monetary policy.

But against these factors, China's Purchasing Managers' Index (PMI) rose to a 13-month high in April, signaling that the world's second-largest economy has found a footing and may be recovering from a first-quarter trough.

"I think it's not all bleak," Mike Lenhoff, chief strategist at Brewin Dolphin, said. "Europe is stuck in a bit of a dump at the moment ... but outside of Europe life goes on. The earnings results are pretty good out of America."

After the U.S. ISM manufacturing index later on Tuesday the non-farm payroll figures on Friday will be the next indicator to offer investors clues on the state of the U.S. economy.

Before that the European Central Bank's policy meeting on Thursday, which precedes weekend elections in France and Greece, could reveal whether attitudes to the euro zone's austerity efforts are changing, and whether there will be a greater emphasis on more growth-oriented policies.

Commodity markets were caught between the conflicting signals of a gradual recovery in China and a rise in worries about the health of the U.S. economy, the world's top two consuming nations.

Brent crude was trading near $119 a barrel while U.S. crude eased 30 cents to $104.57.

Copper traded near $8,400 a tonne after rising to its highest level in nearly a month on Monday. Gold inched up to a two-week high, supported by weakness in the dollar.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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