Dollar Retreat Extends

The US dollar remains under broad pressure after yesterday’s sharp decline. Neither dovish comments by ECB President Draghi, nor the Reserve Bank of New Zealand have managed to reverse the gains of their respective currencies. Similar, the rise in US yields and firm equities have failed to push the yen lower. 

Investors and policymakers are trying to link news developments to the price action, but it seems to be a bit of a stretch. It is true that NY Fed President Dudley, who had suggested in late-August that a rate hike in September was less compelling, warned that financial conditions had tightened considerably since the December and that if this were sustained, it could alter the outlook for growth and the balance of risks.  

However, the market never really had high expectations for a March hike and the yield on the March Fed funds futures slipped a half of a basis point. While the December contract was more volatile, the implied yield finished off a single basis point.  

The US non-manufacturing ISM fell more than expected and at 53.5, it is the lowest since February 2014. Ten of the non-manufacturing sectors reported expansion while eight, including mining and transportation, reported contraction.The volatility of the financial markets and global weakness weighed on sentiment.  Some observers emphasized the weakness in the employment index (52.1, down from 56.3 and the lowest since April 2014.However, this is a bit of selectively lining up the data to fit the price action.The ADP employment estimate was reported a couple of hours before the ISM, and it was a touch stronger than expected.  

Some linked the yen’s surge to reports that underscored that only a small slice of deposits at the Bank of Japan will be hit with a negative rate in a little more than a week’s time. The projection that as the year progresses, there may be as much as JPY30 trillion (of over JPY250 trillion) subject to negative interest rates was known when the announcement was made and was contained in the FAQ posted on Monday.