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US Dollar Ends Day Mixed, Could See Directional Moves on Releases of ISM Services, FOMC Minutes

Monday, 05 January 2009 21:39:17 GMT  |  Terri Belkas, Currency Strategist

The US dollar ended the day mixed across the majors once again, as the currency gained against the euro, Swiss franc, and Japanese yen but fell versus the British pound and the commodity dollars as oil rose toward $50/bbl. There were no market-moving indicators that influenced price action for the US dollar, but notable news included word that President-elect Barack Obama draft a plan to offer about $300 billion worth of tax cuts to individuals and businesses, which would account for about 40 percent of a stimulus package that has grown more than anticipated as it could reach $775 billion over two years. With evidence continuing to emerge that the US recession, which the National Bureau of Economic Research (NBER) has said started in December 2007, will likely extend through much of 2009, the new administration will do everything in their power to go down in history as the ones who saved the economy from falling into a situation akin to the Great Depression. Meanwhile, according to the Commerce Department, construction spending in the US during the month of November fell negative for the second month in a row at a rate of -0.6 percent. Looking at a breakdown of the report, it is clear that residential construction has weighed the overall index down significantly, as spending fell 4.1 percent during the month and plunged 22.8 percent from a year earlier. On the other hand, nonresidential construction spending actually rose 1 percent in November and remains up 9.2 percent from a year ago. Nevertheless, as businesses slowly feel the impact of the US recession, they will be far less likely to expand and build, leaving broad measures of construction spending likely to fall further.

The US dollar will see a pick up in event risk tomorrow. At 10:00 ET, a gauge of conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - is anticipated to have worsened in December as the ISM index is estimated to fall to another record low of 37.0 from 37.3. We already know that the US economy fell into recession long ago, but this data will help to gauge how long the recession will drag on for. A weaker-than-expected result could weigh on the US dollar, but the long-term impact should be limited since the Federal Reserve as already cut rates to a all-time low range of 0.0 percent - 0.25 percent and has few additional options from a traditional monetary policy perspective. The 14:00 ET release of the FOMC’s meeting minutes from December 16, when they slashed rates to a record low target range of 0.0 percent - 0.25 percent, should draw some attention, especially if they highlight the Committee’s plans to support the financial markets via measures that “sustain the size of the Federal Reserve's balance sheet at a high level.” Many have accepted this as an indication that the Fed is pursuing quantitative easing, and if it does seem that they will pursue buying “longer-term” Treasury securities, the US dollar could pull back as this would suggest that interest rates in the US will continue to fall.

Related Articles: US Dollar Could Dive on NFPs - Euro, British Pound May Also Face Bearish Data, US Dollar Weekly Forecast

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