The US dollar started the morning out on a strong note but subsequently pulled back on indications of a worsening contraction in the US manufacturing sector.
The Institute of Supply Management’s (ISM) manufacturing index fell much more than expected to a reading of 43.5 in September from 49.9, marking the worst level since October 2001 and the third consecutive month below 50, which signals a contraction in business activity. Looking into the breakdown of the report, there were few positives. The production component dropped more than 11 points alone to its worst readings since February of 2001 while new orders and employment plunged to levels not seen since October 2001. The employment component is particularly concerning as US non-farm payrolls (NFPs) will be released on Friday and are expected to reflect hefty job losses for the ninth consecutive month, the worst run since NFPs fell negative during 20 of the 24 months from 2001 - 2002. The fundamental aspects for the US economy remain grim, but that does not mean the US dollar cannot rally in this environment. Indeed, the US Senate is set to vote tonight on a $700 billion financial-rescue plan, tying it to an increase in FDIC insurance limits to $250,000 from $100,000 and a two-year extension of tax breaks in order to win support from Republicans. The bill is widely expected to pass the Senate vote, which will only add to speculation that the House of Representatives will approve it as well on its second time through on Friday. There is quite a bit riding on this bill, as evidenced by the massive declines in the US stock markets on Monday and if legislators want to maintain any semblance of financial market stability, they will vote in favor of it. There is significant debate over whom this bill benefits: Wall Street or Main Street? Clearly, Wall Street will be the biggest beneficiary of the bailout, but at this point, Main Street can’t function properly either if the credit markets are frozen. In the end, this may feel like choosing between the devil and the deep blue sea, but it could be the only quick way out of this mess. Related Articles: Dollar Falls As US Manufacturing Report Hits Worst Level Since 2001 Terrorist Attacks, Dollar Could Be Troubled By Rate Cuts Even If Bailout Goes Through Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.