Dollar falls after weak US services sector data, gives up post-employment gains

THE US dollar dropped from three-week peaks on Friday (Jan 5) in choppy trading after data showed the US services sector slumped in December, negating gains posted after a report showing higher-than-expected nonfarm payrolls last month.

The Institute for Supply Management (ISM) said its non-manufacturing index fell to 50.6 last month, the lowest reading since May, from 52.7 in November. The services industry accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the index little changed at 52.6.

More importantly, the ISM’s measure of services sector employment plunged to 43.3 last month, the lowest since July 2020 when the economy was reeling from the first wave of the pandemic. The index was at 50.7 in November.

“The plunge in the ISM services index to a seven-month low in December suggests, at face value, that the economy is sliding into recession,” wrote Andrew Hunter, deputy chief US economist at Capital Economics, in an e-mailed note after the data.

“But the poor relationship between the surveys and the hard economic data in recent times suggests we should take this latest reading with a pinch of salt.”

The dollar index fell 0.4 per cent to 102.0 after hitting 103.10 following the stronger-than-expected jobs report. That was the highest since mid-December.

On the week however, the dollar gained 0.6 per cent, on pace for its best weekly rise since early December.

Earlier in the session, the dollar got a bounce after data showed the US economy generated 216,000 new jobs in December, exceeding the consensus forecast of 170,000. The unemployment rate was steady from November at 3.7 per cent, compared with expectations of a rise to 3.8 per cent, while average earnings rose 0.4 per cent on a monthly basis, against forecasts of a 0.3 per cent gain.

Some analysts said the report suggested that the Federal Reserve would probably be in no rush to cut interest rates over the next few months.

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“It’s obviously a strong report. The market (has) sniffed out a strong jobs report over the past couple of days, so maybe the reaction isn’t as strong as it could have been,” said Adam Button, chief currency analyst at ForexLive in Toronto.

“In terms of the data itself, the revisions take a bit of the shine off the headline number. It is more of a mixed bag than it looks at first blush.” Friday’s data showed the economy added 71,000 fewer jobs in October and November than previously reported.

US rate futures have priced in about five rate cuts of 25 basis points (bps) each for 2024, with the year-end fed funds rate expected at roughly 4 per cent compared with the current level of 5.25 per cent, according to LSEG’s rate probability app. Early last week, the market had factored in six rate declines.

Post-ISM data, rate futures traders have raised easing bets at the March meeting to around 76 per cent, from about 68 to 70 per cent over the last week.

The market also shrugged off data showing US factory orders increased more than expected in November, rising 2.6 per cent after declining 3.4 per cent in October.

In other currencies, the dollar slid 0.4 per cent against the yen to 144.01. It rose as high as 145.98 yen, a three-week peak after the payrolls data. On the week, the greenback advanced 2.2 per cent versus the Japanese currency, on track for its best weekly performance since last August.

The euro, on the other hand, gained 0.4 per cent versus the dollar to US$1.0982. Europe’s common currency fell 0.5 per cent on the week, its largest weekly drop since early December and snapping a run of three weeks of increases.

Inflation across the 20-nation bloc jumped to 2.9 per cent in December from 2.4 per cent in November, just shy of expectations for a 3.0 per cent reading.