By William L. Watts, MarketWatch
LONDON (MarketWatch) -- The U.S. dollar began the week on a soft note Monday, losing ground to major rivals as strong data from purchasing managers in Asia and Europe prompted investors to cautiously up their risk tolerance, strategists said.
HSBC's China Purchasing Managers Index rose to 55.4 in October, up from 55.0 in September and marking the seventh straight month the index has held above 50 -- the threshold marking whether the manufacturing sector is shrinking or expanding. See full story.
Later, the final Markit October manufacturing PMI for the 16-nation euro zone came in at 50.7, breaching the neutral 50-level for the first time in 17 months and confirming a preliminary estimate. More dramatically, the October CIPS/Markit PMI reading for the U.K. factory sector jumped to 53.7 from a reading of 49.9 in September, beating expectations for a more modest rise to 50.2.
"The positive tone of today's data has allowed the euro to push higher versus both the U.S. dollar and the Japanese yen and encouraged" the Australian dollar to climb back above 90.50 U.S. cents versus greenback, said Jane Foley, research director at Forex.com, a currency advisory firm.
A cautious tone in equity trading, however, shows that risk appetite remains relatively subdued, she said.
The dollar index (DXY 76.20, -0.17, -0.22%) , which measures the greenback against a trade-weighted basket of rival currencies, traded at 76.176 in recent action, down from 76.320 in North American trade late Friday.
The euro changed hands at $1.4777, up from $1.4729.
The dollar slipped slightly to 89.84 yen versus the Japanese currency, down from 90 yen Friday.
The British pound, meanwhile, slid 0.5% versus the U.S. dollar to $1.6358.
The Australian dollar changed hands in recent action at 90.45 U.S. cents, down from an earlier high of 90.79 cents.
Asian equity markets posted a mixed finish, while Europe shares gained ground and U.S. stock index futures pointed to a higher open on Wall Street after October ended with a rout.
The dollar has traded in inverse relationship to risk appetite, sinking as equities have gained ground and rebounding when they weaken.
But strategists at BNP Paribas argue that a flood of dollar liquidity has been the driving force in the markets.
That means the statement from the U.S. Federal Reserve's policy-making committee when it completes its meeting Wednesday will outweigh decisions this week by the Reserve Bank of Australia, the Bank of England and the European Central Bank in determining market direction, they argued, in a research note.
"Leaving the statement unchanged signals that the Fed will keep the flood gates of monetary accommodation open for an extended period of time, which might initially by cheered by equity markets," they wrote.
"But in order to get the all-clear for continued U.S. dollar weakness the bond market needs to remain constructive," they said. "In the case of the bond market losing confidence in the Fed's stance of guaranteeing price stability, the equity market rally will soon hit the wall once again, with a stronger U.S. dollar working as the catalyst."
