US dollar rebounds despite disappointing US data

The US Dollar Index has rebounded slightly after a two-day slide despite disappointing US data. The inflation component of the PMI survey, the Price Paid sub-index, edged lower to 69.5 from 65.6 in February.

The Employment sub-index fell to 51.3 from 54. Economic activity in the US services sector expanded at a softening pace in March with the ISM Services PMI declining to 51.2 from 55.1 in February.

The number of job openings on the last business day of February declined to 9.9 million from 10.5 million in January. Factory Orders declined by 0.7% on a monthly basis in February, compared to the market expectation for a decrease of 0.5%.

The US Dollar Index has staged a modest rebound following the two-day slide. The EUR/USD pair still has the potential to test 1.1000 in the near term while Wall Street’s main indexes stay on the back foot after weak US data.

After having suffered heavy losses against its major rivals on Monday and Tuesday, the US Dollar has staged a rebound early Wednesday. Although the US Dollar Index edged lower with the initial reaction to the disappointing US macroeconomic data releases, it didn’t have a difficult time holding its ground. Renewed concerns over a slowdown in the US economy caused Wall Street’s main indexes to open in negative territory and helped USD find demand as a safe haven.

There is a stronger-than-60% probability of the US Federal Reserve leaving its policy rate unchanged at the May policy meeting. Economic activity in the US services sector expanded at a softening pace in March with the ISM Services PMI declining to 51.2 from 55.1 in February.

The inflation component of the PMI survey, the Price Paid sub-index, edged lower to 69.5 from 65.6 in February. The Employment sub-index fell to 51.3 from 54. Employment in the US private sector rose by 145K in March, falling short of analysts’ estimate of 200K, ADP’s monthly report showed on Wednesday.

Chinese Yuan has surpassed the US Dollar as the most traded currency, in monthly trading volume, for the first time in Russia in February. According to the outlet, the gap has continued to widen in March. Last week, Brazil and China have reached an agreement to stop using the US Dollar as an intermediary in trade transactions.

ISM’s Report on Business revealed on Monday that the headline Manufacturing PMI declined to 46.3 in March from 47.7 in February, revealing a contraction at an accelerating pace in the manufacturing sector’s economic activity.

The Prices Paid Index of the PMI survey, the inflation component, dropped to 49.2 from 51.3. This reading suggests that input inflation in the sector softened in March.

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply.

On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.