Dollar swoons after U.S. service sector data disappoints

By Sam Forgione

NEW YORK (Reuters) - The dollar fell against the euro on Thursday after softer-than-expected U.S. services sector data, then briefly fell more and hit a seven-week low against the yen after a report that a grand jury will investigate allegations of Russian meddling in the 2016 U.S. election.

A report from the Institute for Supply Management (ISM) showed its non-manufacturing index fell to 53.9 last month from 57.4 in June. This stoked doubts that the Federal Reserve would raise interest rates again in 2017. While an ISM reading above 50 indicates expansion, the figure was below expectations of economists polled by Reuters for a reading of 57.0.

The non-manufacturing employment index fell to 53.6, below economists' expectations for a rise to 56.5.

The euro rose slightly against the dollar and hit a session high of $1.1892 , just below Wednesday's more than 2-1/2-year high of $1.1909.

"With services growth slowing more than expected, it suggests a greater chance of payrolls disappointing tomorrow," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "That would raise the bar to the Fed raising rates and keep the dollar biased downward."

Economists polled by Reuters expect U.S. employers to have added 183,000 jobs in July, down from 222,000 in June. Fed funds futures on Thursday implied traders saw a roughly 44 percent chance of a Fed rate hike in December, according to CME Group's FedWatch tool.

The dollar extended loses against the euro and Swiss franc in afternoon U.S. trading and hit a seven-week low against the yen of 109.87 yen after the Wall Street Journal reported that special counsel Robert Mueller had convened a grand jury in Washington to investigate allegations of Russian interference in the 2016 U.S. election. The report cited two unnamed people familiar with the matter.

Reuters later reported that grand jury subpoenas have been issued in connection with the June 2016 meeting between Donald Trump Jr., a Russian lawyer and others, citing two sources familiar with the matter.

"The hopes for real growth picking up are just diminishing the more headwinds the administration is getting," said Axel Merk, chief investment officer of Palo Alto, California-based Merk Investments.

Sterling slumped as much as 0.8 percent against the dollar to $1.3113 after the Bank of England kept interest rates at a record low on Thursday. [L5N1KP4P8]

The dollar index, which measures the greenback against a basket of six major rivals, was last down slightly at 92.783 <.DXY>.

(Reporting by Sam Forgione; additional reporting by Saikat Chatterjee in London; Editing by Grant McCool and David Gregorio)

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