Dollar slides on $100 oil and soft U.S. ISM report

NEW YORK (Reuters) - The dollar slid on Wednesday as crude oil hit $100 a barrel and a gauge of U.S. manufacturing fell last month to its lowest level since April 2003, raising expectations for more Federal Reserve interest rate cuts.

Crude oil prices shot 4 percent higher on tight energy stockpiles, exacerbating worries about the U.S. economic slowdown and prompting investors to close risky trades, such as those financed by borrowing cheaply in yen.

That accelerated the dollar's drop against the Japanese currency, with the decline at one point extending past 2 percent, according to Reuters data.

"Risk aversion rises and people buy yen as crude rises," said Camilla Sutton, currency strategist at Scotia Capital in Toronto. Rising crude prices "generally speak to a weak U.S. dollar."

Late afternoon in New York, the dollar had tumbled to the lowest level in more than a month against the yen to 109.21 yen before edging back to 109.46 yen, down 1.94 percent on the day, its biggest one-day drop since February 27, 2007 at current prices.

The dollar briefly recouped some of its losses against the yen after the release of Fed minutes indicated some policy-makers believed tighter credit could require "substantial" interest rate easing. However, they also noted financial conditions could improve quickly, forcing the central bank to reverse those cuts.

Federal funds futures now fully reflect a quarter-percentage point cut in January.

"They were a bit ambivalent, though they did not rule out a chance for a rapid rebound and a reversal of the rate cuts," Samarjit Shankar, senior currency strategist at Bank of New York Mellon in Boston, said of the Fed minutes.

The euro was up 1 percent at $1.4726, after rallying more than 10 percent in 2007 EUR=. It hit an all-time high in November of $1.4968, according to the platform EBS.

The dollar fell 1.4 percent to 1.1173 Swiss francs. Sterling slipped 0.3 percent to $1.9804.

The dollar index .DXY, which measures it against a basket of currencies, fell 0.9 percent, its largest one-day drop since November 20, at that level.

Dealers began to sell the greenback in earnest early in the U.S. session after the Institute for Supply Management reported its index of U.S. factory activity fell to 47.7 in December, reflecting contraction in the sector and dipping closer to levels associated with U.S. recessions.

"The data provides some important hints that the previously relatively resilient manufacturing has lost substantial momentum, and provides some tentative evidence that the U.S. economy may be weighing on global demand more than global demand is able to bolster the U.S. manufacturing sector," said Alan Ruskin, chief international strategist with RBS Greenwich Capital.

"Net-net there is nothing positive for the dollar here."

The manufacturing report also showed the prices component for December rose despite a decline in the headline number, suggesting to some analysts that a negative combination of higher inflation and no economic growth may be unfolding.

"Not very good at all, particularly looking at the prices paid" index, said Mark Meadows, currency strategist at Tempus Consulting in Washington. "It came in above expectations, which suggests that there really may be stagflation in the coming months," he said.

(Reporting by Nick Olivari and Kevin Plumberg, Additional reporting by Steven C. Johnson, Editing by Chizu Nomiyama)