The US dollar went on a wild ride today on the back of the ISM Non-Manufacturing report. Even though ISM fell to the lowest level in 7 years, the dollar strengthened against every major currency. Compounding the losses however were weak economic data from the Eurozone and lower commodity prices.
More specifically, the Euro and the British pound lost steam against the US dollar as economic growth slowed in the European countries amid record high inflation. Falling gold and oil prices dampened the attractiveness of commodity currencies as the Canadian dollar depreciated against the US dollar, with the Australian dollar struggling to stay afloat despite a 25bp increase in interest rates yesterday. The Yen and the Swiss Franc posted minor gains against the US dollar but got capped as the currencies traded sideways during the afternoon session.
The ISM Non-Manufacturing index released earlier today showed that the US economy will continue to face increasing turmoil as it marked the biggest monthly fall to 41.9 from 54.4, which was also the first decline since March 2003. The huge decline in services came about as new orders and employment buckled, and caused increased speculation that the economy will face a recession. The ABC Consumer Confidence report also showed a worsening sentiment among the general public as it decline to -33 from -27. The current economic sentiment may continue to worsen as the US continues to face increasing hardships from the aftermath of the credit crisis, and expect the bearish outlook to progressively dampen the economy.
The securities markets turned sour after two weeks of prosperous trading as the service sector came under pressure, and sent prices plummeting down. The DJIA fell a staggering 370.03points as AIG, American Express, Citigroup, and JP Morgan Chase were the leading losers of the big 30, with the broader S&P 500 falling 73.28 percent. Toyota Motor and Tyco reported a higher than expected rise in profits, but was not able to fend off the bleak economic outlook as their shares prices fell. Commodity prices also felt the rising pressures in the US economy as gold dropped to $892 an ounce while oil fell to trade at $88 a barrel.
US Treasuries stood tall amid the pessimistic outlook for the economy as investors eagerly moved into the safe haven of risk free bonds, and sent the 10-Year yield down to 3.57 percent, with the 2-Year bond yield falling to 1.96 percent. Tomorrow’s release of mortgage applications, non-farm productivity, and the unit labor cost is expected to increase the intensity of the bearish outlook for the US economy, and increased volatility is anticipated for another round of mixed trading in tomorrow’s session.
