The U.S. dollar extended its worst year since 2003 in early European trading Tuesday as investors shunned the greenback in favor of rival currencies amid diverging bets on growth rates in the coming year that could mean big changes for global stocks. 

The dollar index, which benchmarks the greenback against a basket of six global currencies, was marked 0.3% lower from its New Year's Eve close at 91.96 in early trading , the lowest level since mid-September and 1.5% down from where it changed hands just prior to the Christmas break and 9.8% lower than this time last year.

The dollar's slump is at times both puzzling and predictable, given that surging economic activity around the world -- particularly in Europe and China -- is enhancing the values of regional currencies and offering investors multiple opportunities in the search for stronger returns in a low-yield environment.

China's manufacturing sector is running at the fastest pace in four months, according to private sector surveys published Tuesday, while the strongest reading in France's factory segment since 2000 has helped bump the Eurozone's core-economy engine room to its strongest year in three decades.

The gains took the euro to a four-month high of 1.2050 Tuesday while the yuan dipped below 6.5 per dollar to trade at a Sept. 8 higher of 6.4922.

The U.S. economy is also tooling along nicely, with the the Atlanta Federal Reserve's GDPNow forecast suggesting an annualized growth rate of 2.8% over the final three months of the year. That estimate, though, is down from a previous tally of 3.3% and does suggest the so-called "Trump Effect" may be waning.

The CME Group's FedWatch tool suggests traders are only pricing in a 56.2% chance of a rate hike for the Federal Reserve's March 21 policy meeting, a relatively low level of probability given that most market participants think newly-appointed Chairman Jerome Powell will orchestrate at least three hikes over the course of 2018.

Signals from the bond market are also pointing to a modest slowing in the stimulus-pumped economy. 

Benchmark 10-year U.S. Treasury bond yields traded at 2.43% in European dealing and 2-year notes were marked at 1.9%, putting the difference in rates between the pair at just 53 basis points. That so-called "flattening" of the yield curve often suggests slowing growth, while analysts at Morgan Stanley have recently argued that it could be an omen for peaking global stock prices and a rotation into more defensive sectors. 

"One of the most important decisions for equity investors over the next 12 months will involve timing a style rotation into the more defensive areas of the market that are currently out of favor," the bank's cross-asset strategist, Andrew Sheets, said last month. "Given the very low-rate nature of this cycle, we'd expect a flat curve to weigh more heavily on sentiment and encourage a more defensive rotation."

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