· The dollar fell on Tuesday from its highest level in more than two years, undermined by data showing weakness in the U.S. manufacturing sector and a lower-than-expected rise in construction spending.
Against the yen, the dollar slid from two-week highs, as the weak manufacturing report fuelled concerns the United States may be headed for recession.
In late afternoon trading, the dollar index .DXY was down 0.3% at 99.12, after earlier touching 99.58, its highest since May 2017.
The euro was up 0.3% against the dollar at $1.0935.
Data showed the U.S. manufacturing sector contracted in September to its weakest level in more than a decade as business conditions worsened amid U.S.-China trade tensions.
The Institute for Supply Management (ISM) said its index of national factory activity fell to 47.8, the lowest reading since June 2009. A reading below 50 signals the domestic factory sector is contracting.
The dollar was also pressured by a report showing U.S. construction spending barely rose in August.
· “Even though the Fed is lowering interest rates, the dollar is not exactly losing ground because of the domino effect: everybody is following the Fed in cutting rates,” said Juan Perez, senior currency trader at Tempus Inc in Washington.
“With an economy that’s growing at 2% on a quarterly basis while the rest of the world is struggling, the dollar looks like to be the safer asset.”
· Elsewhere, the Australian dollar also underperformed on Tuesday after the Reserve Bank of Australia cut interest rates and expressed concern about job growth.
With rate cuts in Australia, final PMI readings in Europe at seven-year lows, and weak confidence readings in Japan, the dollar scored its biggest quarterly gain in the third quarter since June 2018.
· In Japan, its big manufacturers’ business confidence worsened to a six-year low in the July-September quarter, the Bank of Japan’s closely-watched Tankan survey showed.
· The yen initially weakened after the Tankan data, but firmed against the dollar after the weak U.S. manufacturing report. The dollar was last down 0.4% against the yen at 107.70 yen JPY=.
· U.S. Treasury yields on Tuesday afternoon hovered near session lows hit after the Institute for Supply Management (ISM) reported its U.S. manufacturing activity index fell in September to its lowest level in a decade.
The two-year yield fell to a three-week low, last down 6.4 basis points to 1.558%. The two-year yield is a proxy for investor expectations of Federal Reserve interest-rate policy. Forecasts that the Fed will cut rates at its October meeting rose to 62.5% on Tuesday from 39.6% the previous day according to CME Group’s FedWatch tool.
The benchmark 10-year yield was down 2.2 basis points to 1.649%, falling slower than the two-year yield and as a consequence, steepening the yield curve to 9.1 basis points, the highest in two weeks. The spread between the two- and 10-year yields was 4.1 basis points at Monday’s close.
Investors will now focus on labor market data with the ADP private sector payrolls report due on Wednesday and the government’s nonfarm payrolls report on Friday.
· A gauge of U.S. manufacturing showed the lowest reading in more than 10 years in September as exports dived amid the escalated trade war.
The U.S. manufacturing purchasing managers’ index from the Institute for Supply Management came in at 47.8% in September, the lowest since June 2009, marking the second consecutive month of contraction. Any figure below 50% signals a contraction.
The new export orders index was only 41%, the lowest level since March 2009, down from the August reading of 43.3%, ISM data showed.
The deeper contraction in the manufacturing sector is the latest sign that the escalated trade war between the U.S. and China is taking a big bite from the economy. Manufacturing was once considered a big winner under the Trump administration with improvements in employment and activity over the past few years.
President Donald Trump blamed high interest rates and a strong dollar for the weakness in manufacturing, saying in a tweet Tuesday that the Federal Reserve “allowed the Dollar to get so strong ... that our manufacturers are being negatively affected. Fed Rate too high.”
The sector contracted for the first time in more than three years in August, ending a 35-month expansion period where the PMI averaged 56.5%, according to ISM.
· Early last week, the White House circulated a policy memo outlining a process that would evaluate whether the Trump administration should limit U.S. capital flows into Chinese securities, a move that administration officials later called “fake news” after media outlets began reporting on it.
The memo, viewed by CNBC on Tuesday, does not make a policy recommendation but outlines the reasons why potential investment limits should be studied.
· Prime Minister Boris Johnson will on Wednesday unveil his final Brexit offer to the European Union and make clear that if Brussels does not engage with the proposal, Britain will not negotiate further and will leave on Oct. 31.
British Prime Minister Boris Johnson’s new Brexit plan will leave Northern Ireland in a special relationship with Europe until 2025, the Telegraph newspaper reported on Tuesday.
The plan, which will be unveiled on Wednesday, means Northern Ireland will remain in large parts of the European Union single market until at least 2025 but the province will leave the EU customs union along with the rest of the UK, according to the report.
· Oil futures sank on Tuesday as weak U.S. economic data dimmed crude’s demand outlook and pressured prices, while reports of a third-quarter decline in output from the world’s largest oil producers kept oil from falling further.
Brent crude futures LCOc1 settled at $58.89 a barrel, a 36-cent loss, while U.S. West Texas Intermediate crude CLc1 settled at $53.62 a barrel, down 45 cents.
Oil pared some losses in post-settlement trade after American Petroleum Institute (API) data showed crude stocks unexpectedly fell last week by 5.9 million barrels, compared with analysts’ expectations for an increase of 1.6 million barrels.
The Energy Information Administration’s weekly oil inventories report is due at 10:30 a.m. EDT (1430 GMT) on Wednesday.
Reference: CNBC, Reuters
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