Dollar, yields slip as U.S. data suggests less hawkish Fed

By Herbert Lash and Huw Jones

NEW YORK/LONDON (Reuters) - The dollar weakened and Treasury yields eased on Tuesday as data showing a plunge in the sale of new U.S. single-family homes in July opened the door to a less hawkish outlook from the Federal Reserve at its Jackson Hole symposium on Friday.

Gold snapped a six-session losing streak while Wall Street was little changed on hopes the Fed will turn dovish after data also showed U.S. private-sector business activity contracted for a second straight month in August to its weakest in 18 months.

"The data indicates a major contraction, showing the economy has weakened quickly, opening the door to the idea that the Fed might not be that aggressive," said Edward Moya, senior analyst at OANDA.

The U.S. economy looks to be headed into another energy price shock in the winter, with natural gas prices at their highest since 2008, said Bill Adams, chief economist for Comerica (NYSE:CMA) Bank in Dallas.

With demand cooling, another big negative shock looks likely and a recession is also more likely than not between now and mid-2023, if one is not already underway, Adams said.

Wall Street backed off earlier gains, with the Dow Jones Industrial Average off 0.32%, the S&P 500 rising 0.03% and the Nasdaq Composite advancing 0.26%.

The dollar index fell 0.633% as the euro rose 0.46% to $0.9987. U.S. Treasury yields slid from multi-week peaks after the data showed signs of a slowing economy.

The yield on 10-year Treasury notes was down 3.7 basis points at 2.9980%, slipping below 3%.

Earlier the euro fell to fresh two-decade lows after data showed euro zone business activity contracted for a second straight month in August as the war in Ukraine is expected to ensure the outlook for the European economy remains bleak.

China's yuan weakened to a two-year low and sterling briefly touched its weakest since March 2020 benefited the dollar.

While the S&P flash composite Purchasing Managers' Index (PMI) of business activity in Europe was not as bad as feared, analysts said more grim news for the economy is likely given how gas prices have surged to record highs ahead of winter.

MSCI's global stock index was down 0.08%, while the STOXX index of European company shares shed 0.4%, having fallen for nearly a week. The benchmark is about 11% off its record high of Jan. 4.

Benchmark gas prices in the European Union surged 13% overnight to a record peak, having doubled in just a month to be 14 times higher than the average of the past decade. [NG/EU]

Europe was braced for fresh disruption in energy supplies from Russia.

"I can't see the Ukraine war coming to an end anytime soon, that would be the catalyst for a market rally. That is going to keep pressure on energy prices and as for the euro, the only way is down," said Michael Hewson, chief markets at CMC Markets.

Stocks had begun to recover on bets the U.S. Federal Reserve would pivot next year away from its rate rising path.

Markets reversed bets on the Fed raising rates by 75 basis points next month, with the probability of a 50 basis points in September now at 55.5% and the bigger hike at 44.5%.

Sterling moved off 2-1/2 year lows against the dollar after the PMI for Britain showed business activity slowing in line with expectations.

Graphic: Euro slumps to 20-year lows against the robust dollar https://fingfx.thomsonreuters.com/gfx/mkt/egvbkdgqapq/euro2308.PNG

CHINA UNEASE

Asian shares were down for a seventh straight session on Tuesday after a renewed spike in European energy prices stoked fears of recession and pushed bond yields higher, while tipping the euro to 20-year lows.

Unease over China's economy continued to percolate as a cut in lending rates and talk of a fresh round of official loans to property developers underlined stresses in the sector.

Chinese blue chips were off 0.5%, while the yuan fell to an almost two-year low. [CNY/]

The Nikkei lost 1.2% after a PMI survey showed factory activity in Japan slowed to a 19-month low in August.

Oil prices gained as Saudi Arabia warned that the OPEC+ producer alliance could cut output. [O/R]

U.S. crude recently rose 4.0% to $93.96 per barrel and Brent was at $99.75, up 3.4% on the day.

Graphic: Summer's Over https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwybqlpo/Two.PNG