NEW YORK — The dollar slid to its lowest in months against most major currencies on Friday after weak U.S. factory data reinforced expectations the Federal Reserve would cut benchmark interest rates next year.

The U.S. currency slumped to a 14-year low against the British pound and a 20-month low against the euro after the Institute for Supply Management’s survey of national manufacturing in November showed its key index at the lowest since April 2003, at 49.5. A reading under 50 indicates a contraction.
Friday’s report compounded concerns about a slowing in the U.S. economy, following data on Thursday that showed business activity in the Midwest shrank in November for the first time in 3-1/2 years.

“This number will definitely continue to fan fears of a hard landing for the U.S. economy and it compounds an already negative tone for the dollar that came from yesterday’s disappointing Chicago PMI,” said Omer Esiner, a senior market analyst at Ruesch International in Washington, D.C. “This is consistent with the view that the U.S. economy is moderating and could prompt a Fed rate cut in 2007.”

Sterling rose to $1.9847 , the second straight day it has reached its highest since September, 1992 — just before Britain abandoned the European Exchange Rate Mechanism, the precursor to the euro. Investors are looking for sterling to rally to the $2 level, last reached in September 1992.

In early afternoon trading, the pair was up 0.7 percent at $1.9792.

The dollar fell to a 20-month low against the euro for an eighth straight day. The euro peaked at $1.3348, moving closer to its record high of $1.3667 hit in December, 2004, before easing to $1.3322, up 0.6 percent.

Euro/yen touched a record high of 154.11 yen, according to EBS. The dollar fell to a three and a half month low against the yen at 114.95 yen , according to Reuters data. The pair last traded at 115.26 yen.

Dollar/Swiss franc fell to an 18-month low at 1.1899 francs. The pair last traded at 1.1906.

The dollar could keep weakening because of imbalances in the U.S. economy but was unlikely to suffer an abrupt fall, EU Economic and Monetary Affairs Commissioner Joaquin Almunia said on Friday.

Fed chairman Ben Bernanke did not discuss the economy or the outlook for inflation or interest rates on Friday in brief remarks at a conference on monetary policy.
Source: Reuters