The dollar tumbled to new lows against the pound and the euro yesterday after the US manufacturing sector contracted unexpectedly for the first time in almost four years.
Factory activity shrank in November for the first time since April 2003 as new orders, production and employment fell and their raw material bills rose.
The figures were the latest in a string of downbeat data that have fuelled fears that the US economy is set for a hard landing.
Sterling rose as much 1 per cent to $1.9805, putting it within two cents of breaching the two-dollar level. The pound has not been worth two dollars since shortly before the pound's exit from the European exchange rate mechanism.
David Bloom, global economist at HSBC, said: "The dollar is just coming under waves of assault here. It is quite something to see."
The dollar dropped to $1.3323 against the euro and has slumped by 12 per cent so far this year - although it is still some distance from the record low of $1.3666 in December 2004.
Ken Rogoff, a former chief economist at the International Monetary Fund who has forecast a fall in the dollar of between 20 and 40 per cent, said the greenback would hit €1.40 next year. He told The Independent: "As long as the US external position is so vulnerable, the market is right to be nervous every time the dollar starts to drift downwards." But he added: "We still seem to be in a period of generally low volatility across markets, where a precipitous dollar crash is unlikely."
The latest fall was driven by the survey by the Institute for Supply Management, whose index unexpectedly dropped to 49.5 from 51.2 in October - where a number below 50 denotes contraction.
The Commerce Department said construction spending declined 1 per cent in October, adding to a growing pile of evidence that the housing market is cooling.
"Housing and now manufacturing are in serious trouble," said Ken Wattret, European economist at BNP Paribas. "The Federal Reserve's view that 95 per cent of the economy is in fine fettle is increasingly under threat."
Ben Bernanke, the Fed's chairman, passed up an offer to support the dollar at a conference on monetary policy yesterday, deciding not to discuss the economy or the outlook for inflation or interest rates. Earlier this week, Mr Bernanke issued a hawkish statement, warning that inflation was "uncomfortably high", but the markets brushed this aside to continue selling the dollar. Julian Jessop, chief international economist at Capital Economics, said: "The markets are paying more attention to the latest data, which largely contradict what Bernanke was saying."
However, traders in London ignored an unexpectedly weak set of UK manufacturing data. Factory activity grew at its weakest in eight months, a report showed. The survey of 620 factory managers showed its index fell to 52.6 in November from 53.5 in October. Manufacturers cut staffing levels for the first time in six months.
John Butler, European economist at HSBC, said: "Given the rise in trade-weighted sterling and evidence of slower global growth, we would expect this downward trend in output and inflation to persist."Reuse content