The United States Dollar (USD) continues to be the world’s dominant reserve currency. This position has been tightly held since the end of World War II. The USD still sits at the center of global trade and finance. It constitutes over 88% of all FX turnover, highlighting its significance in global markets. In September, market analysts anticipate a slight easing in the ISM Services PMI, although they remain focused on the Employment Index and other economic indicators that influence the USD’s value.
The USD is the US’ official currency. Furthermore, it serves as the ‘de facto’ currency in several other nations. Over 100 nations use the USD in tandem with their local currencies, an indication of the USD’s global acceptance and trustworthiness. This wide global circulation of the USD furthers its standing as the most widely circulated and traded currency in the world. In 2022, daily USD transactions averaged an extraordinary $6.6 trillion.
Economic Indicators Impacting the USD
In this context, the Federal Reserve (Fed) uses primarily interest rate increases and decreases to steer the value of the USD. Monetary Policy market expectations are heavily influenced by the relationship between inflation, unemployment rates and interest rates. Similarly, when inflation predictably retreats below 2%, the Fed should lower interest rates. This move can help blunt the strength of the dollar, particularly applicable should our unemployment shoot up to double digits.
Recent macroeconomic data has not been very bullish for the USD. According to the Manufacturing PMI, which instead of growing reached a reading of 49.1 in August, manufacturing activity is contracting. A number below 50 indicates that the economy in that sector is contracting. All the while, the Employment Index has remained in contraction territory for three straight months, scoring 46.5. These larger-than-expected figures imply that very real persistent pressure remains in the labor market that may complicate forward-looking monetary policy decisions.
The New Orders Index is still in expansion territory, printing at 56, showing optimism about future demand. These contrasting economic indicators underscore the dilemma facing policymakers. At the root of it, they have to figure out how to continue fostering economic growth while still curbing rising inflation.
ISM Services PMI and Its Significance
While we are still seeing some contraction in manufacturing, the ISM Services PMI gives a much more rosy outlook for the USD. The most recent services ISM print indicates that the services sector has grown for the third consecutive month. That’s the thirteenth month of growth in the last fourteen months and a negative fourteen months of activity. A reading above 50 in this index indicates expansion, and expansion is typically seen as a bullish signal for the dollar.
The services sector is the bedrock of the U.S. economy. Retirement often overshadows manufacturing due to its size and large contribution to GDP. Because of this, continued expansion here can offer a cushion against collapse from oncoming economic storm winds that are hitting the other industry. Market participants watch these trends very closely, given their critical importance to prospective monetary policy and the health of the broader economy.
Similarly mixed trends are suggested by the Prices Index tied to the ISM Services PMI. In August, the reading came in at 69.2, down modestly from July’s 69.9. This suggests that while inflationary pressures remain elevated and persistent, the worst of those are perhaps still behind us. These readings have only added more fire to the inflation-obsessed discourse and the price pressures narrative. They are likely to profoundly shape upcoming Fed decisions on interest rates.
The Impact on Currency Pairs and Market Sentiment
The fluctuations in USD’s value have a huge effect on every currency pair, especially on EUR/USD pair. A surprise negative print from important indices like CPI and PMI can really change the mood in the markets. This would likely send the pair retesting the 1.1770 area. Traders and investors alike are very attuned to these moves as they reflect how things are going in terms of global financial markets.
As this economic data keeps developing, analysts will always be on the lookout for how these indicators affect each other. The interplay between the ISM Services PMI, Manufacturing PMI, Employment Index, and inflation data will provide essential insights into future monetary policy directions from the Fed.