Dollar Drops on ISM Disappointment, Can it Fall Further on Tomorrow's NFP's?

The US Dollar continued lower for the second consecutive trading day, as a key ISM Non-Manufacturing report showed that employment fell in the broader Services economy for the first time sine 2003. Traders instantly sent the greenback lower against major trading counterparts, as the Services sector figure predicts a likewise dismal result from tomorrow?s Non Farm Payrolls report. The weight of expectations ahead of the NFP release kept the dollar suppressed through the afternoon, but a late bounce showed fleeting signs of hope for the downtrodden currency.

The Euro breached the psychologically significant $1.3700 mark for only the second time on the month, later easing to $1.3684 on a small dollar bounce. The British Pound was likewise bid against the greenback, rallying to heights of $2.0266 before a small correction left it at $2.0222. Mixed performance in the Dow and other international equity indices left the Japanese Yen nearly unchanged, with the dollar inching ¥0.10 to ¥115.30.
Morning economic data sent the dollar significantly lower against major trading counterparts, as a disappointment in the ISM Services Employment index worsened outlook for the broader US economy. The headline ISM Services figure actually came in slightly above consensus forecasts at 55.8 versus 54.5 expected. Yet the reasonably high headline hid the disappointments in the underlying components, with the Employment index falling to contraction territory at 47.9 versus 51.7 previous. This confirms broader fears that the services sector continues to shed jobs on recent credit market troubles, with the future looking dim for the overall labor market. Combined with recently dismal ADP Employment data, the outlook looks very bearish for this Friday’s Non Farm Payrolls report. Current consensus forecasts for a 100k gain through August seem increasingly optimistic, with the reality of the matter likely to show a disappointing labor result through the period.

Domestic equity markets had a much more positive reaction to the news, with the Dow Jones up nearly 0.5 percent through time of writing. Indices were largely in negative territory ahead of the ISM number, but the positive surprise in the headline figure boosted outlook for corporate shares. The S&P 500 likewise inched higher on the day, adding 6 points to 1,478. Tech shares were similarly improved, with the NASDAQ Composite up 11 points at 2,617 ahead of the close.

Government Treasury bonds moved lower despite the bearish outlook for domestic employment, with the 2-year note shedding 3/32 points to 99 and 7/8. Yields on the shorter-dated debt instrument gained 6 basis points to 4.07 percent.

Written by David Rodriguez, Currency Analyst for