FOREX-U.S. dollar, yen slide as data fuels safe-haven exit
* Fed's Bernanke defends loose monetary policy, market steady * Likely Moody's downgrade could push Madrid to seek bailout * Euro zone PMI not as bad as earlier estimates * U.S. manufacturing sector improves in September By Gertrude Chavez-Dreyfuss and Daniel Bases NEW YORK, Oct 1 (Reuters) - The U.S. dollar fell from a three-week high against major currencies but the yen weakened on Monday after a report of a rise in U.S. manufacturing activity prompted a sell-off in safe-haven currencies. The U.S. manufacturing sector in September grew for the first time since May, getting a boost from new orders. Also giving risk appetite a boost was an increase in Germany's purchasing managers' index (PMI), which rose last month to its highest reading since March, although it was still below the 50-mark dividing expansion from contraction. "While the U.S. economy experienced a 'soft patch' in growth during Q3, today's report adds to evidence of a modest recovery," wrote Michael Woolfolk, senior currency strategist at BNY Mellon Global Markets in New York. "Global markets reacted more strongly than expected to this second-order release, suggesting sensitivity to upside U.S. economic surprises," Woolfolk wrote clients. U.S. Federal Reserve Chairman Ben Bernanke defended the Fed's loose monetary policy and its controversial bond-buying plan, saying it was necessary to support a flagging economic recovery. Bernanke added the central bank still expects the economy to grow but not quickly enough to bring down unemployment. He also said he does not see an inconsistency between the Fed's policies and maintaining a strong U.S. dollar. However, factory activity in China was weak contracted, in a sign the world's No. 2 economy lost momentum for a seventh consecutive quarter. China has been a crucial engine of global growth. The U.S. dollar index, a gauge of the greenback's performance against six major currencies, was last down 0.15 percent at 79.815 after rising as high as 80.147, its strongest level since Sept. 11. Speculators boosted bets against the safe-haven dollar in the latest week to the highest in more than a year, according to data from the Commodity Futures Trading Commission released on Friday. The euro, on the other hand, rallied from three-week lows against the dollar, boosted mainly by the German data and decent manufacturing numbers from debt-plagued Spain and Italy. But traders said gains could be limited by concerns about a possible credit rating downgrade for Spain. The euro rose 0.22 percent to $1.2886, although some analysts said its resilience was due less to confidence in the euro zone than to dollar weakness after the Fed unleashed its third round of monetary easing last month. The common currency hit a three-week low of $1.2802 in Asian trade, breaking below support at its 200-day moving average at $1.2823. A daily close below $1.2823 could signal further weakness ahead. Camilla Sutton, chief currency strategist at Scotia Capital in Toronto, said she expects the euro to trade in a range of between $1.28 to $1.32 against the U.S. dollar until there is a catalyst sufficiently large to push it out of the range. She added that Scotia's year-end target was $1.26 for the currency pair. Investors are awaiting the outcome of a review by credit agency Moody's of Spain's sovereign debt rating. Europe's fourth largest economy may be downgraded to junk status, adding pressure for the country to seek an international bailout soon. "A downgrade could force Spain's hand in seeking a bailout and should see a relief rally in the euro," said Adam Myers, senior foreign exchange strategist at Credit Agricole. "But until that happens, weak economic data will add to the downward pressure on the euro." YEN WEAKNESS The yen, another safe-haven, also suffered a setback in the wake of the upbeat U.S. manufacturing report. The dollar edged up 0.13 percent against the yen to 78.00 yen, off a more than two-week low of 77.43 yen hit on Friday. The euro rose 0.29 percent against the Japanese currency to 100.50 yen. The Bank of Japan's quarterly tankan survey of business sentiment released on Monday showed big Japanese manufacturers expect the dollar to average around 79.06 yen in the fiscal year through March 2013. The survey also showed the mood among major manufacturers worsened in the latest quarter and was likely to stay gloomy, dragged down by weak Chinese and European demand.
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