US Dollar Consolidation Continues, Japanese Yen Gains as Equities Pull Back

The US dollar continued to consolidate on Wednesday, as the DXY index held to a tight range of 77.45-77.82, while the Japanese yen gained as uneasy risk appetite weighed US equities down. Data showed that conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - deteriorated in July as the Institute for Supply Management index unexpectedly fell to 46.4 from 47.0 as the business activity, new orders, new export orders, and employment components all weakened at a faster pace. This was the tenth straight month that ISM held below 50, signaling a broad contraction in activity, and differs quite a bit from Monday’s ISM manufacturing result, which was actually better than anticipated. Furthermore, factory orders surprisingly rose for the third straight month in June, this time at a rate of 0.4 percent. This deviation between sectors adds to evidence that any sort of US economic recovery may be dependent upon foreign demand for US exports, as domestic demand is likely to remain hindered by rising unemployment through 2009.

Meanwhile, leading indicators for this Friday’s non-farm payroll (NFP) report continue to yield mixed results. First, Challenger, Gray & Christmas said that job cut announcements fell 5.7 percent in July from a year earlier, marking the second straight decline. Next, the ADP employment change fell by the least since October 2008, coming in at -371,000 in July, compared to a revised -463,000 in June. Finally, the employment component of ISM non-manufacturing fell to 41.5 from 43.4, signaling a steeper drop in jobs, while Monday’s release of the employment component of ISM manufacturing rose to 45.6 from 40.7, signaling that the pace of job losses slowed. With a Bloomberg News poll of economists calling for NFPs to drop by 328,000 in July, it looks like the results could generally fall in line with expectations.

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