Dollar falls after EU growth cuts; pound surges

MADRID (MarketWatch) — The U.S. dollar fell across the board on Tuesday after the European Commission lowered its forecasts for growth in the euro-zone region, while the British pound soared on news of record growth in the U.K.'s services sector.

The ICE dollar index (DXY) , which tracks the U.S. currency against six others, fell to 80.577, from 80.606 late Monday in North America. The WSJ Dollar Index (XX:BUXX) , a rival gauge of the U.S. unit, fell to 72.81 from 72.89.

The commission downgraded its euro-zone gross domestic product forecast for 2014 to 1.1% from the 1.2% expected previously, and lifted its unemployment projection to 12.2% from 12.1%. For 2013, the commission expects the economy to contract 0.4%, with joblessness at 12.2%, both unchanged from the May forecast.

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The euro (EURUSD) , which is the biggest component in the ICE dollar index's comparison basket, pinned down the greenback. Europe's shared currency bought $1.3490, versus $1.3504 in Asian hours and $1.3510 late Monday.

The euro came under heavy pressure last week, in part due to data showing slowing inflation in the currency bloc, raising the chances for further easing there.

"Some economists are even calling for another rate cut by the [European Central Bank] on Thursday. While we believe this forecast is overly aggressive, the reasoning is sound because inflation is a top priority for the central bank, and there's a good chance that [ECB President] Mario Draghi will be less optimistic and appear more inclined to ease monetary policy," said BK Asset Management managing director Kathy Lien.

Noting a nearly 2% gain for the ICE dollar index the previous week, Crédit Agricole analysts said the U.S. currency "is likely to consolidate its gains over the short term ahead of Friday's U.S. October employment report."

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"Nonetheless, despite some near-term consolidation the [dollar] looks set to gain further over the coming weeks, helped by the fact that the market had already squared a lot of long positions over past weeks," Crédit Agricole said in a note early Tuesday.

Economists polled by MarketWatch expect on average for October nonfarm payrolls to rise 100,000 after a 148,000 increase in September, with the unemployment rate ticking higher to 7.4% from 7.2%.

BK Asset Management's Lien said a weaker U.S. jobs report would likely be a function of last month's government shutdown, dampening the effect of any surprises in the data.

"We should see the dollar selloff if payrolls are weak, but the losses could be limited," Lien wrote late Monday.

"The bigger reaction could actually be to a stronger payrolls report. If [the gain in nonfarm payrolls] exceed 150,000, we expect to see an aggressive short squeeze in the dollar because the stronger number would consistent with the Fed's less pessimistic views," she said, referring to the outlook from the Federal Reserve.

The British pound (GBPUSD)  leaped to $1.6050, meanwhile, after the Markit/CIPS U.K. Services PMI for October rose to 62.5 in October, versus September's 60.3, the biggest increase in activity since May 2007. Gains were driven by a sharp rise in new business.

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The Japanese yen (USDJPY)  strengthened, with the U.S. dollar moving as low as ¥98.25, but still below late Monday's ¥98.68.

Aussie sinks on policy statement

The Aussie dollar also moved up against the greenback in premarket U.S. trading. The Australian dollar (AUDUSD)  rose to 95.32 U.S. cents, up from 95.08 U.S. cents late in the previous day.

Earlier on Tuesday, the Aussie dollar fell after the Reserve Bank of Australia held interest rates steady, but with its governor saying the currency remained overvalued.

"The Australian dollar, while below its level earlier in the year, is still uncomfortably high," said Gov. Glenn Stevens in a statement accompanying Tuesday's policy decision. "A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy."

The remarks echoed similarly dovish comments from the central-bank chief last week.