FOREX-Dollar drops as U.S. services data suggests slowing growth

Mon Jan 6, 2014 11:24am EST

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(Updates prices, changes DATELINE; previous London))

* U.S. services sector growth slowed in December

* Euro helped by data ahead of ECB meeting

* Yen firms as stock markets fall

* Focus on U.S. Fed minutes and jobs data

By Julie Haviv

NEW YORK, Jan 6 (Reuters) - The dollar dipped against the euro and yen on Monday as weaker-than-expected data gauging the U.S. services sector reflected slowing growth at the end of last year.

The greenback's losses accelerated after two readings showed U.S. services sector growth slowed in December, pointing to an economy that continues to expand at a modest pace, while factory orders rose in November.

The pace of growth in the U.S. services sector slowed for a second straight month in December with business activity expanding at a lower rate and new orders contracting, according to the Institute for Supply Management.

Separately, financial data firm Markit said its services sector Purchasing Managers Index eased slightly from the prior month, slipping by 0.1 to 56.1 in the month.

The reports could add to expectations that the Federal Reserve will pare its monthly bond purchases at a gradual pace this year.

New orders for U.S. factory goods, however, rebounded in November, adding to signs of strong momentum in the economy in late 2013.

The dollar index, which tracks the greenback against a basket of six major currencies, last traded flat at 80.756 after hitting 80.910 earlier in the global session, its highest since Dec. 4.

The euro, meanwhile, benefited from positive euro zone data the suggested the European Central Bank will not loosen policy further any time soon.

The euro recovered from a one-month low to trade 0.4 percent higher at $1.3638, finding support as euro zone sentiment hit its highest in nearly three years.

The euro was up 0.2 percent at 142.68 yen.

The euro zone Composite Purchasing Managers Index, which gauges how thousands of manufacturing and services companies fare every month, rose to 52.1 in December, in line with forecasts, with readings above 50 indicating growth.

The euro was last year's best-performing major currency - driven by factors such as euro zone banks repatriating funds to shore up their capital bases and repaying cheap loans to the ECB - but it lost ground late last week.

The upbeat euro zone data came ahead of he ECB's first policy meeting of 2014 on Thursday. While another rate cut after November's surprise move is seen an unlikely, the bank has the ability to issue further cheap loans to banks.

"The big question is whether the recovery in the euro zone is real or sustainable. This indicates at least it isn't faltering," said Marshall Gittler, head of global FX strategy at IronFX Global. "There's no need (for them) to come out with a sudden move. I'd expect to see the same sort of message from (ECB President) Draghi as last week."

At the end of last month, Draghi said in a magazine interview he saw no urgent need to cut rates further and no signs of deflation.

Investors are looking to minutes of the U.S. Federal Reserve's December meeting, due on Wednesday, for signs of how trading in the early part of the year will unfold. The minutes could hint at the timing and pace of any further reductions in Fed stimulus.

Friday will bring the December U.S. payrolls report, which could suggest whether domestic job growth is strong enough for the Fed to continue tapering its asset buying.

The yen, meanwhile, pulled away from recent five-year lows versus the dollar and the euro as a fall in global stocks prompted traders to buy the safe-haven Japanese currency.

Asian shares led global stocks lower after growth in China's services sector slowed sharply last month.

The Nikkei and the yen - last year's weakest major currency - tend to move in opposite directions.

"This is very much driven from Asia ... The yen has been used as a funding currency and will gain support," said Ian Stannard, head of European currency strategy at Morgan Stanley.

The dollar was last down 0.2 percent to 104.64 yen, according to Reuters data.

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