Dollar Rally Staggers After News Manufacturing Sector Contracted (Forex Key Events Up

[DailyFx]

After the strong revision to the US second quarter GDP number last week, the outlook for the US economy and the dollar has found a new life. However, this growth reading is already dated; and there have been obvious holes developing in the economic rebound suggesting it will be difficult to maintain the recent rate of expansion.Can another round of disappointing data turn the dollar advance?





Dollar Rally Staggers After News Manufacturing Sector Contracted
After the strong revision to the US second quarter GDP number last week, the outlook for the US economy and the dollar has found a new life. However, this growth reading is already dated; and there have been obvious holes developing in the economic rebound suggesting it will be difficult to maintain the recent rate of expansion. Aside from housing and consumer spending, an otherwise disregarded component of growth has been the business sector. The ISM manufacturing report for August brought this precarious component of growth back to the forefront after printing a 49.9 reading (a reading below 50 suggest contraction in the sector). For the market, this was unexpected (the official consensus was looking for an unchanged 50.0 reading); but the real disappointment is that factories have not been able to capitalize on the still relatively week US dollar and the recent plunge in input prices (like oil). As domestic demand falters with rising unemployment and slowing wage growth, the details from the ISM report show that new orders have contracted for nine consecutive months. What’s more, the breakdown shows employment has worsened, production has cooled and customer inventories have grown. For conviction on 3Q growth forecasts, a better outlook for broader economic activity will be garnered with Thursday’s ISM service sector report (services make up 70 percent of the economy). With EURUSD testing a trend from the March 2006 low, this data has given the market a fundamental reason to doubt the dollar’s massive rally. Can another round of disappointing data turn the trend?




US ISM Manufacturing Survey – (Monday)
Though this indicator has been somewhat lost in the fray of financial turmoil, surging commodity prices and interest rate policy; the ISM manufacturing activity gauge was once the top market moving indicator (even beating out NFPs). Obviously the survey has lost some of its tout; but it may nonetheless be growing in stature. With the US dollar rallying off the strong 2Q GDP number, the market is now left to determine whether the housing recession and slowdown in consumer spending will truly drag the economy back into the red. One sidelined component to activity has been business activity. Capital investment, employment and revenues are engines for growth. If this indicator slips back under water, third quarter growth could be in for a reading more like the 4Q 2007 contraction rather than the 2Q 2008 surprise.


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