The US dollar pulled back sharply on Tuesday, especially against the high-yielding commodity dollars, amidst a pickup in demand for carry and an improvement in investor sentiment.
While volatility remains relatively high, overnight interest rates have cooled down quite a bit, allowing the global stock markets to bounce higher. With the greenback being treated as a “safe haven” asset, it is this increase in risk appetite that is driving the currency lower. Will this move continue? That depends, again, on risk trends, but one thing we may be able to count on is disappointing US data on Wednesday. Indeed, conditions in the US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to worsen in October as the Institute for Supply Management index is estimated to fall to a nine-month low of 47 from 50.2. There is also downside potential since confidence remains exceptionally weak, as the Conference Board’s measure fell to a record low of 38 during the same month. The key thing to watch is to see if ISM Non-Manufacturing falls below the 50 mark - signaling contraction - as the news will only add to bearish sentiment on the US economy following the 0.3 percent contraction in US Q3 GDP and the plunge in ISM Manufacturing to the lowest level since 1982. If the news spurs fears in the financial markets, leading stocks lower, the US dollar could actually gain amidst flight-to-quality. These days, negative US data counterintuitively tends to provide at least a short-term boost to greenback. Related Article: US Dollar Forecast Depends On Risk Sentiment, NFPs Likely To Disappoint Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.