The U.S. Dollar Overlooks ISM Surprise in Risk Sell-off, Cedes Ground to Other Majors

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- USD declines as trade fears return, sink global stocks.

- Analysts overlook ISM surprise, stay cautious on growth.

- Risk assets and currencies to suffer if tensions endure.

The Dollar was down Thursday following a better-than-expected reading of the latest Institute for Supply Management (ISM) Non-manufacturing PMI and as global markets went into meltdown due to fears for the embryonic 'trade war' detente between the U.S. and China. 

The ISM Non-manufacturing PMI rose to 60.7 in November, up from 60.3 previously, when markets had been looking for a decline to 59.1. Activity within the sector rose by 2.7%, representing a 112th consecutive month of growth, while new orders and employment increased 1% and 1.3% respectively. 

"The non-manufacturing sector continued to reflect strong growth in November. However, concerns persist about employment resources and the impact of tariffs. Respondents remain positive about current business conditions and the direction of the economy," says Anthony Nieves, chair of the Institute for Supply Management. 

PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.

Markets care about the data because it is an indicator of momentum within the economy. And economic growth has a direct bearing on consumer price pressures, which dictate where interest rates will go next.

"So far the ISM non-manufacturing index is averaging higher in Q4 than it did in either of the two previous very strong quarters for economic growth. However, we wouldn't read too much into that as this tends to be a less reliable indicator of real economic trends than even its manufacturing counterpart. As such market reaction should be limited," says Andrew Grantham, an economist at CIBC Capital Markets

Grantham's concerns were echoed by other economists Thursday, who appear to be placing more emphasis on alternative measures of activity across the economy, which are all pointing to a slowdown in the pace of growth being up ahead. 

"Looking at the incoming activity data, it looks like GDP growth is on track to slow to around 2.5-3.0% annualised in the fourth quarter, from 3.5% in the third. But that is still well above the economy’s potential growth rate, and with the drop back in oil prices giving a boost to disposable incomes, we expect economic growth to remain fairly strong over the coming quarters too," says Michael Pearce, an economist at Capital Economics

The U.S. Dollar index was quoted -0.35% lower at 96.67 following the release, owing largely to steep losses against the safe-haven Japanese Yen and Swiss Franc, as well as other major currencies such as the Pound and Euro.

The Pound-to-Dollar rate was 0.48% higher at 1.2789 while the Euro-to-Dollar rate was up 0.44% at 1.1398. The greenback was higher against almost all other G10 currencies, as well as emerging market currencies.

Price action in the currency world comes as global stock markets sink lower for a third consecutive session. The S&P 500 fell -2.34% immediately after the open Thursday and all major indices in Europe lost more than -2% too. 

"The pressure on risk assets continues, with the arrest of theHuawei CFO in Canada (for extradition to the US) adding further question marks about the credibility and the durability of the short-term trade war truce struck between US and China over the weekend," says Petr Krpata, a currency and interest rate strategist at ING Group.  

Canada's detention of Huawei's CFO and China's subsequent objection has stoked fears for the embryonic truce between the world's two largest economies, which had boosted markets earlier in the week as some investors hoped it would lead to a lasting resolution of the so-called trade war between the two countries. 

However, many analysts were immediately sceptical of just how long the truce and improved mood in the market would last, given perceived differences the two parties' respective understandings of exactly what had been agreed at the weekend's G20 summit. 

"Given the nature of the sell-off, Asia-linked G10 currencies (AUD and NZD) are set to underperform the rest of the G10 FX space. In the EM space, Asia FX is set to lag, closely followed by LatAm as the associated decline in risk appetite in also spilling into the commodity prices," Krpata adds.

Cracks in the newfound peace emerged Tuesday when President Donald Trump took to Twitter to remind the world that tariffs on Chinese exports to the U.S. will rise in 90 days if a satisfactory resolution to differences over trade is not found by negotiators.

"We are either going to have a REAL DEAL with China, or no deal at all - at which point we will be charging major tariffs against Chinese product being shipped into the United States. Ultimately, I believe, we will be making a deal - either now or into the future...China does not want tariffs," Trump later wrote on Twitter.

The G20 agreement had averted a January 01 increase in the tariff rate levied on some of China's exports to the U.S., which many had said would damage the global economy. Markets were speculating on Thursday that this truce has been endangered by the overnight developments in Canada. 

The trade war detente appears to be at risk of falling apart at a time when the expectations of a pause in the Federal Reserve (Fed) climb toward higher interest rates are mounting.

The Fed has raised rates eight times since the end of 2015, and on three occasions in 2018.

The Dollar has reigned supreme over all other currencies this year as a result of the Fed's policy, but a slowing economy and renewed fears over the outlook for international trade could mean the greenback's days in the sun are nearly over. 

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