The US dollar tanked lower on Thursday following the release of US ISM non-manufacturing data. As a result, the euro US dollar exchange rate briefly touched US$1.10.
The euro remained resilient on Thursday as eurozone retail sales rebounded in August. Retail sales data released by the EU’s statistic agency Eurostat showed that sales increased 0.3% month on month in August, up from a -0.6% decline the previous month. On an annual basis retail sales were 2.1% higher.
Market participants consider retail sales to be a gauge for future inflation. Stronger retail sales often indicate stronger inflation down the line. This is a positive for the eurozone, which is experiencing lacklustre inflation at just 0.9%, well below the European Central Bank’s 2% target.
Any gains in the euro were capped by the announcement that the US would be taking advantage of the World Trade Organisation’s (WTO) ruling and applying tariffs on $7.5 billion worth of European goods. The WTO ruled that the EU illegally subsidised the European Aviation giant, Airbus.
US Recession Fears Grow
Concerns over the heath of the US economy have weighed on the value of the dollar in recent sessions and today was no different. The PMI for the US ISM non-manufacturing sector (services) fell to 52.6 points in September. This was well below August’s 56.4 and short of analysts forecasts of 55. Whilst the score still indicates expansion in the sector, the steep fall raises concerns over a recession.
The weak service sector data comes following a steep contraction in the US manufacturing sector and concerns over job creation in the private sector. The dollar fell as investors believe that the Fed will cut rates again this year.
| Why do interest rate cuts drag on a currency’s value? |
| Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available as the demand of that currency declines, dragging the value lower. |
Dollar investors will now look ahead to the US jobs report, the non-farm payroll. This is the mostly highly anticipated data release across the month. The Federal Reserve and investors alike, use the report to asses the health of the US labour market and more broadly the US economy. A weak reading could fuel fears of a recession and pull the dollar sharply lower.
| What do these figures mean? |
| When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written: 1 EUR = 1.12829 USD Here, €1 is equivalent to approximately $1.13. This specifically measures the euro’s worth against the dollar. If the U.S. dollar amount increases in this pairing, it’s positive for the euro. Or, if you were looking at it the other way around: 1 USD = 0.88789 EUR In this example, $1 is equivalent to approximately €0.89. This measures the U.S. dollar’s worth versus the euro. If the euro number gets larger, it’s good news for the dollar. |
