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US Dollar Gains Against Euro, Yen Despite Dismal Data, Slump Versus High Yielders

Tuesday, 06 January 2009 21:13:35 GMT  |  Terri Belkas, Currency Strategist

The US dollar has consistently been trading stronger than the euro, Swiss franc, and Japanese yen but has also remained weak versus the British pound and the commodity dollars. Much of this price action had to do with emerging signs of building risk appetite, such as the slow decline of the CBOE’s VIX volatility index below 40, despite the fact US economic data was broadly disappointing. Looking at the data on hand, the ISM non-manufacturing index - a gauge of business activity in the services sector - surprisingly rose to 40.6 in December from 37.3. A breakdown of the report shows that new orders, employment, and new export orders all edged higher. However, it is necessary to keep in mind that all of the index readings remained below 50, so they ultimately indicate that growth in the services sector is still contracting, just not as sharply.

Meanwhile, factory orders tumbled 4.6 percent during the month of November, marking the fourth consecutive month of negative readings. This is similar to what we saw in the ISM manufacturing index for December, and since that index is timelier, the record low results suggest that demand for manufactured goods is bound to fall further. In addition, pending home sales slumped 4.0 percent during November, as fewer individuals signed contracts to purchase homes. Demand for properties remains lackluster as the economy slows, job losses climb, and borrowing costs remain high despite aggressive rate cuts by the Federal Reserve. With supply levels still relatively high, the lack of demand indicates that prices have further to fall in 2009. Finally, the minutes from the Federal Open Market Committee’s December meeting didn’t reveal much in the way of new information, but simply confirmed some of the more dour outlooks amongst economists, as some Committee members thought that there was “a distinct possibility of a prolonged contraction.”

Looking ahead to the next 24 hours, the Challenger Job Cut index and the ADP Employment Change will both be released. While these are not typically market-moving reports, they will be worth watching as they may help to handicap the results of Friday's non-farm payrolls report. Challenger Job Cut are likely to show that companies laid off a greater number of workers in December from a year earlier, while the ADP Employment Change is forecasted to reflect the most job losses in the private sector since at least 2001. Such results would suggest that US non-farm payrolls may have indeed plunged another half-million or more during December alone.

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


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