On Monday, the US dollar recorded gains against the British pound and the euro aftermarket data turned out to be more upbeat than expected.
As per the numbers, activity in the US services industry saw a boost in November unexpectedly, thereby fueling speculation that the interest rate hike by the US Federal Reserve might be bigger than predicted recently.
The data
According to the Institute for Supply Management (ISM), October had seen their non-manufacturing PMI to be around 54.4, but it rose in November to 56.5.
This indicated that the services sector had managed to stay resilient, despite the interest rate hikes delivered by the US Federal Reserve.
It should be noted that over two-thirds of economic activity in the United States is generated via the services sector.
Economists had predicted that the non-manufacturing PMI would decline in the month of November to 53.1.
This particular survey came soon after the wage and job growth data that had been published last Friday for the month of November and had turned out to be stronger than expected.
October also saw consumer spending increase.
Optimism
Thanks to the upbeat reports, markets have now become optimistic about being able to avoid an economic recession in the coming year.
Growth has slowed down sharply and this has given rise to speculation about just how the Federal Reserve will take the interest rates.
Market experts said that the PMI data from ISM indicated that there is still some strength in the US economy even though the financial conditions have tightened significantly.
They said that this was undoubtedly good news where the growth outlook is concerned, it does not bode well for the Fed, which is trying hard to reduce inflation by dampening demand.
Last week, the chairman of the US Federal Reserve, Jerome Powell, said that the pace of interest rate hikes could be scaled back by the central bank as early as December.
Dollar movements
On Friday, the US dollar had reached a low of three and a half months against the Japanese yen to 133.62, but Monday saw it record gains of 1.68% to reach 136.615.
On Monday, the British pound had managed to hit $1.2345 in Asian trading, which is a high of five months, but by 2:15 p.m. EST, the currency had seen a drop of 0.94% to $1.2178.
There was also a 0.42% drop in the euro to $1.0494 after it had climbed to its highest value since June 28th at $1.0585.
Last week saw the dollar index drop 1.4%, which tracks the value of the greenback against other major currencies.
The overall drop in the dollar index in November was about 5%, which made it the worst month for the currency since 2010.
Market strategists said that the problem had been about a peak dollar, peak interest rates as well as peak inflation.
However, it was now turning into an issue of persistent inflation and persistent interest rates that would remain higher for longer.
Other factors
The aggregate position of the US dollar against other G10 currencies has now become neutral after it fell to its lowest value not seen since August last year.
It is possible that the dollar may no longer see any softening, considering that the Fed is expected to maintain its hawkish stance for some time.
Moreover, China opting to ease its COVID-19 restrictions could also result in complications and there is a possibility of further hikes in the price of oil and gas.
The Chinese yuan has seen a boost against the dollar after the country’s change in COVID-19 policy.
