US Dollar Extends Losses as ISM Services PMI Slides and Chinese Trade Retaliation Weighs

-ISM services index falls further than expected in March.

-Downturn in "new orders" component proves a drag on the index.

-Dollar under pressure as markets digest Chinese trade action.

© Kasto, Adobe Images

The Dollar extended earlier losses against a basket of comparable rivals during noon trading in London Wednesday as markets responded to a deeper than expected fall in the ISM services index, which came closely on the heels of China's response to President Donald Trump's latest trade tariffs.

The ISM non-manufacturing index fell to 58.8 for the month of March, down from 59.5 in February, which is below the 59.0 reading that economists and markets were looking for. This came largely as a result of a decline in the new orders component of the index, which measures activity and forward looking sentiment among some 400 of America's largest services companies.

Currency markets have shown only limited sensitivity to US data of late although traders may have taken the fall in the ISM index as an indication that US economic momentum has waned in the first quarter of the year. This matters for those who are seeking to gauge the Federal Reserve's likely appetite for interest rate rises through the rest of the year.

“Growth looks to have slowed to more like 2.0% - 2.5% annualised in the first quarter, from 2.9% in the fourth quarter, but the continued strength of the business surveys suggests this is unlikely to mark the start of a weaker trend. We still expect the recent fiscal stimulus to help drive an acceleration in GDP growth to 2.8% for this year as a whole,” says Andrew Hunter, a US economist at Capital Economics.

All other major currencies rose against the greenback Wednesday, leaving the US Dollar index 0.20% lower at 90.02. The Pound-to-Dollar rate was 0.015 higher at 1.4069 while the Euro-to-Dollar rate was 0.17% higher at 1.2297. 

"Investors will be unwilling to hold dollars for long – and indeed will use rallies as a selling opportunity – because of the current trade war," says Chris Turner, global head of foreign exchange strategy at ING Group. "We would recommend risk-averse positions right now and see the USD/JPY recovery stalling in the 106.70/107.00 area. Favour a return to 105.00 near term." 

The US economy has remained in a relatively robust condition of late, supported by the implementation of President Trump's tax cuts which have boosted confidence among companies and consumers, with the latest example of this coming last week when the final estimate of US GDP for 2017 was revised higher to 2.9%, from 2.7%.

Statisticians found US consumer spending had risen faster than previously thought in the final months of the year while inventories proved less of a drag on output too. In addition, the economy is still expected to see a demand filip from White House plans for new infrastructure investment later in the year. However, all of this has done little to aid the Dollar, which remains close to a four-year low after international investors dumped it by the bucket load during the first quarter. 

Greener pastures elsewhere have been a factor in the Dollar rout although many investors are also shunning the world's reserve currency due to fears over an anticipated increase in the so called twin deficit. A rising "twin deficit" describes, at its most basic level, an increasing US appetite for borrow from the rest of the world, which is itself the result of White House tax reforms that are stretching the public purse and enabling Americans to buy more imported consumer goods.

"Long-term forecasting in FX is a perilous task, however the current technical picture and valuation backdrop do point to an increased probability that the dollar is now in a new downward ‘cycle’ since the dollar bull-run peaked at the end of 2016. This could mean that a 6-7 year bear market begun in 2017," says Derek Halpenny, European head of global markets research at MUFG. "Based on the average period and the average percentage change in the previous USD cycles, we may well be looking at a DXY index level of close to 60.000 by the year 2024. So the long-term picture based on the assumption of a new long-term cycle being in place is not good for the dollar."

When you’re already $500 Billion DOWN, you can’t lose!

— Donald J. Trump (@realDonaldTrump) April 4, 2018

Wednesday has so-far given traders even more reason to the avoid the Dollar too, now that China has retaliated against President Trump's latest tariffs, which prompted risk-off trading that saw global stock markets shift lower and safe haven assets such as gold rise. 

"China’s rapid and aggressive response to the proposed US tariffs has raised the stakes for both sides. But its move to publish a list of counter-tariffs is primarily intended as a deterrent and we think there is still time to de-escalate trade tensions before the tariffs come into force," says Julian Evans-Pritchard, a senior China economist at Capital Economics.

Chinese officials announced tariffs targeting 106 different US export products that have a collective trade value of some $50 billion this Wednesday. The move is in response to the White House having targeted China's medical, pharamaceutical and industrial machinery sectors with other tariffs, which US officials say is a counter to alleged-intellectual property theft. Fears are that this spat could quickly escalate into a series of further retaliatory action that would hurt investor confidence and crimp global economic growth.

We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!

— Donald J. Trump (@realDonaldTrump) April 4, 2018

"It is still uncertain how this will play out. China’s response could embolden Trump to push for broader US tariffs, escalating trade tensions further. Equally likely, however, is that there will be some compromise that allows both sides to row back, or at the very least, water down the proposed tariffs," Evans-Pritchard adds. 

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