The confluence of unfriendly US data, Fed-related uncertainty, and the dissipation of safe-haven demand has pushed the US dollar broadly lower ahead of this week’s FOMC policy announcement.
There are three reasons why the US dollar (USD) is trading lower against all major currencies this morning: economic data, speculation about the next Federal Reserve Chairman, and the latest developments in Syria.
According to the most recent US economic reports, the recovery in the manufacturing sector is losing momentum. In the New York region, manufacturing activity dropped to its lowest level in four months with the Empire State index falling to 6.29 for the month of September, down from 8.24 in August.
Over the past few months, weaker activity in NY has not coincided with slower activity across the nation, but this is another piece of data that will challenge the Fed’s upcoming monetary policy decision. Industrial production activity accelerated in the month of August, but the increase was less than the market had anticipated, and this was also the fifth consecutive month that industrial productivity missed expectations.
New Front-Runner for Next Fed Chairman
Over the weekend, Larry Summers withdrew his name from consideration as the next Fed Chairman. Compared to Janet Yellen, he was largely viewed as a bigger friend to the dollar. While Summers and Yellen are both doves who feel that growth is a bigger risk than inflation, Yellen played a key part in designing the central bank's current quantitative easing (QE) program, and more recently, she was a big advocate of forward guidance.
Summers, on the other hand, has not shared his views on monetary policy, but his unpredictability and potential for unscripted comments means he could have caused more volatility in the financial markets. While he was President Obama's preferred candidate, his decision to bow out was motivated by his concern that Obama would not be able to rally the Senate behind his nomination.
See related: Fed Rumor Sparks “Lightning Rod of Controversy”
Yellen was the more dollar-negative candidate, and now that she has become the clear front-runner, the currency has traded lower across the board.
Syria Resolution Is a Done Deal
The greenback also lost its safe-haven bid after the US and Russia reached a deal on Syria over the weekend. Syria must submit a comprehensive list of its chemical weapon stockpiles in one week and allow international inspectors to be on the ground no later than November. All chemical weapons must be destroyed or removed by mid-2014 or the United Nations would have the authority to use force. With a military strike no longer an imminent threat, the US dollar and the price of oil have both moved lower.
The Dollar’s Biggest Event Risk This Week
Looking ahead, the focus this week is on Wednesday’s Federal Open Market Committee (FOMC) rate decision, although the latest string of weaker economic reports has made it even more difficult for the central bank to justify tapering this month. A slowdown in consumer spending, decline in confidence, and sluggish job growth all suggest that the recovery is losing momentum, but at this stage, there are two remaining motivations for tapering this week.
See also: The Only 2 Reasons Left to Taper Now
By Kathy Lien of BK Asset Management