Dollar steadies, helped by US services sector data
NEW YORK, March 4: The dollar traded flat against the euro on Friday after rising earlier on a snapshot of the US service sector in February that exceeded market expectations and offset a below-consensus measure of US consumer sentiment.
Benchmark dollar-denominated US government debt yields hit their highest levels in a year, burnishing the greenback’s attraction to global investors.
Even so, the dollar remained on track to post its second consecutive weekly decline against a basket of major currencies, pressured by the European Central Bank’s interest rate rise on Thursday and mounting speculation the Bank of Japan could end its ultra-loose monetary policy as early as next week.
This last week has been dominated by events outside the US and these events have been broadly dollar-negative, said David Mozina, head of foreign exchange strategy at Lehman Brothers in New York.
But this data is a reality check not to lose track of the fundamentals here in the US, which provide dollar-buying opportunities, he said. It’s not as if conditions have fallen apart here and are less interest rate-supportive — far from it.
The Institute for Supply Management’s non-manufacturing index in February rose to 60.1 from 56.8 in January, above forecasts of 58.0.
That gave a boost to dollar bulls, who had been hurt earlier by a fall in the University of Michigan’s final February consumer sentiment index to 86.7 from the preliminary February figure of 87.4 and January’s final reading of 91.2.
Late afternoon, the dollar was up 0.6 per cent at 116.49 yen rebounding sharply from a low of 115.57 yen after the currency pair failed to break through chart support around 115.50 yen immediately after Japanese inflation data were released earlier in the day.
The euro was flat at $1.2040, coming off a one-month high of $1.2052 struck earlier on Friday, and sterling was flat at $1.7548.
The dollar was flat at 1.2972 Swiss francs.
The dollar has had a fairly bruising week, with sentiment dented by the ECB’s rate hike and Japanese economic data fueling expectations that the BOJ will begin to shift policy, perhaps as early as next week.
But the ISM services data gave the dollar some reprieve.
The headline was better than expected and this may be the catalyst the market needed to begin a round of pre-weekend dollar short-covering, based on the moves over the last couple of days for a generally weaker dollar, said Ron Simpson, managing director of global currency analysis at Action Economics LLC in New York.
US interest rates were also on the rise, along with those in the euro zone and elsewhere. The yield on 10-year Treasury notes hit a one-year high around 4.69 per cent on Friday.
Lehman Brothers on Friday lifted its forecast for the benchmark federal funds rate to 5.5 per cent by August or September from 5 per cent. Benchmark US interest rates currently stand at 4.5 per cent.
If February’s US employment report were surprisingly weak, it could curb market expectations for how far the Fed would go on raising US interest rates and weigh on the dollar, analysts said.
For the dollar next week, the main event will be the employment report. The market is still pricing in a fair amount of further Fed tightening and the dollar could be vulnerable to disappointment on the data front, said Daniel Katzive, foreign exchange strategist with UBS in Stamford, Conn.
The median forecast of economists polled by Reuters is for a rise of 200,000 non-farm payroll jobs in February.
The dollar pared gains against the euro after Minneapolis Fed President Gary Stern said in an interview with Reuters that the Fed does not need to raise interest rates beyond a neutral range at present.
In Japan, economic data showed that core consumer prices rose 0.5 per cent in January from a year earlier, the biggest annual increase in nearly eight years and above the market consensus.
Armed with the data, the BOJ is expected to scrap its super-loose “quantitative easing” policy, possibly as soon as its meeting ending next Thursday. But even after such a move, overnight rates are seen holding close to zero.—Reuters
