May 06 2008
Is the USD Correction over?
Yesterday, The USD briefly extended its decline vs. the EUR for the first time in three days after Oil prices hit a record high at more than $120 a barrel. High commodity prices are only exacerbating an already weak economic backdrop, sparking debate over the strength of the U.S. economy.
Also yesterday, the ISM Non-Manufacturing Composite index showed that the U.S. services sector grew in April for the first time in 3 months. The Institute for Supply Management’s Non-Manufacturing index came in at 52.0 in April vs. 49.6 in March, snapping a three-month period of contraction. A reading above 50 indicates growth in the service sector. The service sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants. Nevertheless, this news was overshadowed by a Federal Reserve survey showing that the banking sector remained in the grips of a credit crunch. A quarterly Fed survey showed that 70% of U.S. banks increased loan rates due to costs from funding commercial and industrial borrowing. The credit crunch worries left investors wary of dollar fallout causing the dollar to fall against a basket While last week’s better than expected US jobs report has tempered expectations for a June Fed rate cut, the economy still remains weak and has yet to bottom out. Analysts continue to believe that there is ongoing downside risk to the U.S. economy. Nonetheless, traders anticipate that the Fed will leave its main interest rate unchanged at 2% through October, based on futures prices on the Chicago Board of Trade.
Looking ahead to today, there will be no significant news released from the U.S. markets. The greenback is expected to weaken vs. the EUR ahead of this weeks’ crucial U.S. fundamental data. On Wednesday, we expect the Unit Labor Costs, the Nonfarm Productivity and the Pending Home Sales indices. Remarks from Fed Governor Kroszner, and the former Federal Reserve Chairman Greenspan will also be closely monitored
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