NEW YORK/LONDON: The dollar marched higher on Tuesday after a report on the US services industry in August reinforced the view that the economy was not in recession, while the euro and rate-sensitive Japanese yen continued to tumble.
The dollar index rose 0.557% after the Institute for Supply Management said its non-manufacturing PMI edged up to a reading of 56.9 last month from 56.7 in July, the second consecutive monthly increase after three months of declines.
The growth in services followed the ISM’s manufacturing survey last week that showed US factory activity grew steadily in August in contrast to other major economies.
“People recognize the US economy is slowing, but it’s still the least ugly in the contest,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.
While the dollar’s path of least resistance is upward, its strength will be challenged next week when the US Consumer Price Index for August is released, Chandler said.
“The early call is for a decline in the month-over-month headline rate,” he said. “But the core rate will be stickier.”
The British pound and the euro tried to recover from multi-year lows against the dollar hit on Monday.
Central bank rate hikes are garnering the attention of the currency markets, with the Bank of Japan standing out at the Jackson Hole symposium as the only one that remains resolute about keeping monetary policy accommodative, HSBC said in a note. The correlation of the dollar-yen exchange rate with US yields has rebounded to near its strongest year-to-date level, HSBC said. The bank changed its forecast for the pair to 144 at the end of the third quarter up from 140 previously. The yen weakened further, down 1.48% at 142.71 per dollar. The dollar is up 24% against the Japanese currency so far this year. The yield on benchmark 10-year US Treasury notes jumped 14.1 basis points to 3.332%. In contrast, the yield on 10-year Japanese government bonds was 0.24%, due to the BOJ’s yield curve control policy. Sterling and the euro earlier gained against the dollar, with the pound up 0.04% to at $1.1528. The euro was down 0.26% to $0.99.
Britain’s incoming Prime Minister Liz Truss is considering a freeze on household energy bills to try to avert a winter cost-of-living crisis for millions of households, Reuters reported on Monday.
European Union ministers will meet on Sept. 9 to discuss urgent bloc-wide measures to respond to a surge in gas and power prices that is hammering Europe’s industry and hiking household bills, after Russia curbed gas deliveries to the bloc.
The Australian dollar slid to a seven-week low after the Reserve Bank of Australia raised its cash rate by 50 basis points, but signalled it was not on a preset path for future rate hikes.
In China, the authorities’ efforts to slow the yuan’s recent depreciation were proving unsuccessful, with the yuan slipping to a fresh two-year low of 6.9784 in offshore trade. China’s central bank late on Monday cut the foreign exchange reserve requirement ratio (RRR), freeing up dollars for banks to sell.
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