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The U.S. Dollar Extends Intraday Loss after ISM Services PMI Follows Manufacturing Lower

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- USD extends intraday loss after the February services PMI slides.

- Services follows manufacturing PMI and equipment spending lower.

But USD to hold range, only a global upturn can topple King Dollar.

The Dollar extended an intraday loss Wednesday after the Institute for Supply Management (ISM) non-manufacturing index came out lower than was expected for the February month, suggesting growth within the mighty U.S. services sector has softened of late. 

The ISM non-manufacturing PMI came in at 56.1 for February, down from 59.7 previously and beneath the consensus for a decline to only 58.1. As a result, it's followed in the footsteps of the manufacturing PMI, which was also reported lower on Monday.  

Driving the decline were falls in the business activity and new orders sub-indices, with the activity index dropping -7.3% to 59 while the new orders index declined -6.2% to 65.2. The employment index edged higher by 0.7% to 55.9.

"The non-manufacturing sector’s growth cooled off in March after strong growth in February. Respondents remain mostly optimistic about overall business conditions and the economy. They still have underlying concerns about employment resources and capacity constraints,” the ISM says, in a statement. 

Above: Selected ISM survey responses. Source: Institute for Supply Management. 

"It's not a major indicator, but the drop in the US ISM non-manufacturing index to the lowest level in nearly two years will underscore the impression that America's growth rate is decelerating," says Avery Shenfeld, chief economist at CIBC Capital Markets

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 almost always dictate where interest rates will go next. 

Wednesday's services PMI comes barely a day after the core-durable goods orders data showed equipment spending and some items of business investment falling sharply during the February month.

Weakening U.S. economic indicators now have markets eyeing the Federal Reserve (Fed). The Fed is currently on hold and investors are unsure whether it will lift its interest rate for a tenth time in the current economic cycle, or if a faltering economy will ultimately force it to cut rates next.

That is the question most likely on the minds of investors and analysts as they scrutinise each piece of new data that emerges from the U.S.

Above: Pound-to-Dollar rate shown at daily intervals.

The Pound-to-Dollar rate was 0.12% higher at 1.3143 following the release, after extending an earlier intraday gain by a fraction. It's up 3.1% for 2019. 

The Euro-to-Dollar rate was 0.27% higher at 1.1231 after paring by a fraction, an earlier 0.31% gain. It's down -2.04% this year. 

Meanwhile, the Dollar index was -0.25% lower at 97.04, after falling from 97.14 before the release. It's up 1.1% for 2019. 

Above: Euro-to-Dollar rate shown at daily intervals.

Wednesday's data is of increased importance to the Dollar because of recent changes in the global economic league tables. After three years of Federal Reserve (Fed) interest rate rises and a blockbuster 2018 for economic growth the Dollar has been dominant in the G10 league table. 

"The global monetary policy backdrop has shifted dramatically in recent weeks as central bankers have abandoned any hawkish pretenses. This has left the major currencies in a race to the bottom and in short supply of strong directional drivers," says Ned Rumpeltin, European head of FX strategy at TD Securities.

many analysts had in January suggested the White House tax cuts that supported growth last year would begin to wear off in in 2019, and that other economies elsewhere would experience a pick-up in growth. 

The consensus conclusion that followed from this was that markets would soon see an end to the Fed rate hiking cycle appearing on the horizon, as U.S. growth slowed and inflation pressures weakened, and that investors would increasingly look for the European Central Bank (ECB) to raise its own rates. 

That shift was supposed to bring about an end of the 2018 Dollar uptrend and prompt a sustained recovery of the Euro-to-Dollar rate.

Those analysts were right in that U.S. growth does now look to be slowing. However, growth in Europe and other places has slowed even further, so the Dollar has not yet capitulated from the highs seen last year.

"We have tempered our expectation for a weaker USD this year. Instead we think risks are balanced and largely two-way for most major currencies in the months ahead. This suggests range trading could continue until fresh catalysts emerge," Rumpeltin writes, in a recent briefing to clients. 

Above: Dollar Index (DXY) shown at daily intervals.

"These ranges will not last forever, but with the major central banks sidelined, it may be some time before a sustained move can get traction," Rumpeltin says. "With this in mind we think the spectrum of short-term risks could favor some additional USD strength."

As a result of 2019's developments in the global economic league table, neither the Federal Reserve nor the ECB are expected to raise rates at all in 2019. This has left the Dollar supported by a Fed Funds rate that is almost 3% higher than the Eurozone cash rate.

If weaker data were to encourage speculation of the possible Federal Reserve rate cut over the coming months then it could potentially undermine the Dollar and lift the Euro however, it could require a recovery of the Eurozone economy to generate a sustainable shift in currency markets.

In other words, Eurozone growth needs to pick up before the Dollar uptrend will well and truly come to an end although, and in the absence of this, weak U.S. economic data can temporarily undermine the greenback at times over the coming months.

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