US Dollar: September PMI Surveys Do Little To Lift The Greenback's Malaise

The Dollar slid on Friday, giving back more of its earlier gains, while September's PMI surveys gave traders little reason to lift the malaise around the currency.

The US Dollar weakened during noon trading Friday as the Fed-induced boost from earlier in the week continued to fade and a mixed set of September PMI surveys did little to incentivise a renewed bid from traders.

September manufacturing activity gathered pace at a faster than expected rate than had been forecast by economists, with the IHS Markit manufacturing PMI rising from 52.8 to 53.0, although the services sector disappointed once again.

The services sector saw a further deterioration during the current month, with the PMI dropping from 56.0 to 55.1, while economists had pencilled in a lesser fall to the 55.8 level. This was even after an earlier downgrade to the August number, which had initially been reported at 56.9.

Despite the mixed headline numbers, economists noted the numbers cover a period where some parts of the US economy were hit by hurricane-related disruption. 

“The US economy showed encouraging resilience in a month of hurricane disruption. Although the September surveys indicated a moderation in growth of business activity, the overall rate of expansion remained robust, " says Chris Williamson, chief business economist at IHS Markit. "Historical comparisons of the PMI with GDP indicate that the surveys point to the economy growing at an annualised rate of just over 2% in the third quarter."

Overall, the manufacturing PMI improved from a low base while the services PMI slipped from a much higher peak, leaving economists more concerned over the state of activity in the manufacturing sector. 

"Some manufacturers noted that Hurricane Harvey had led to temporary disruptions to production at their plants," IHS Markit. "However, there were also signs of underlying fragility in September, with new orders expanding at one of the slowest rates seen over the past year. Latest data also indicated that new export sales remain close to stagnation."

The Pound-to-Dollar rate was a rare exception to the trend of Dollar weakness, with the British currency marked down by 0.60% to 1.3498. The Euro-to-Dollar rate, on the other hand, was 0.28% higher at 1.1977. The US-Dollar-to-Japanese-Yen rate was down 0.46% at 111.93.  

"The USD is softer, with losses over the past two sessions so far essentially taking back 3/4 of the gains seen on the FOMC conclusion mid-week," says Shaun Osborne, chief FX strategist at Scotiabank. "Despite markets having to recalibrate near-term Fed policy expectations, prompting a fairly significant squeeze on USD short positions, the USD is finding little traction into the end of the week, suggesting an underlying weak bias persists."

Fed Stays The Course But Dollar Bounce Was Short-lived 

The US Dollar strengthened broadly Wednesday after the Federal Reserve surprised markets by maintaining its course toward a December rate hike in its latest round of projections, but since then it has steadily given back gains.

"The main surprise after yesterday’s FOMC meeting was the hawkish policy signal delivered by the Fed’s updated dot plot projections," says Derek Halpenny, European head of global markets research at MUFG. "The market was surprised that the Fed still remains strongly committed to delivering one more rate hike this year despite recent dovish comments from Fed speakers, which have signalled more concern over low inflation."

Yellen & Co's move led to some movement in bond markets as investors and traders repriced the US rate curve, taking into account an anticipated 75 basis points worth of hikes in 2018, as opposed to the one or two hikes consensus had begun to favour. 

"The rise in US short rates has provided some much needed support for the beleaguered US dollar in the near-term, although the scale of the rebound is only modest so far," says Halpenny. "It highlights that it will take more one than just another Fed rate hike this year to support a more sustained rebound for the US dollar into year end."