Greenback Plummets as Traders Return

Many countries are still on vacation today, but an influx of traders coming back to the market following the holidays led the dollar to plummet this morning, with EUR/USD surging to one month highs of 1.3288 and GBP/USD up more than 150 points to 1.9735. The greenback trekked losses to yen as well, though the USD/JPY decline was less severe as the pair dipped to 118.50 from Friday’s New York close of 118.96.

The economic calendar was sparse, with manufacturing sector data the sole releases out of the Euro-zone and UK. First, manufacturing PMI for the Euro-zone edged slightly lower in December to 56.5 from 56.6, as strong German reports picked up some of the slack for dismal French confidence. A breakdown of the data showed improvements in output, however, the new orders and employment indices declined marginally. Furthermore, input prices slipped while output prices gained, indicating greater pricing power amongst producers. Overall, the data still highlights resilience in the Euro-zone manufacturing sector, and will likely underpin a hike by the European Central Bank in Q1 2007.

The UK’s PMI manufacturing index unexpectedly fell to a nine-month low in December as output and orders dropped. The fact that the British pound traded at record highs during the month was of no help to UK exports, as the products quickly became more expensive and less attractive in other countries. A breakdown of the data showed that the price components declined, which will not help the case for inflation hawks in the Bank of England. Today’s release highlights the fragile nature of the manufacturing sector, which became increasingly important to the UK economy in 2006. Nevertheless, the headline report remains above 50 and therefore continues to signal expansion in the sector.

Most markets in the US are closed today in order to observe a national day of mourning for former President Gerald R. Ford. All releases that were scheduled to post today have been pushed back to Wednesday, making it an even more precarious day for the greenback, with ADP employment, ISM manufacturing, and the December FOMC meeting minutes on tap. Dollar bulls will be looking for a strong ADP reading ahead of NFPs on Friday and a move of the ISM report back above 50 into expansionary territory. Meanwhile, traders will be attempting to gauge whether the Fed is ringing a more dovish tone in the FOMC minutes. If this is the case, the dollar could ring up even more hefty losses this week.