USD Gives Back Gains Ahead Of ECB Meeting

The US dollar retreated – falling the most in one day for the past 4 months as weak US data and a desire to take profits on an overstretched up-move made traders sell the greenback. The dollar had until recently been ignoring technical signals that it was overbought, as it continued its seemingly relentless upward march. It was particularly overbought versus the Japanese yen and this caused profit-taking to bring it back to 108.70 after the pair briefly crossed above the psychologically important 110 level on Wednesday.

News that US manufacturing growth slowed down significantly during September also spurred some dollar selling. According to the Institute of Supply Managers, its manufacturing activity index dropped to 56.6 in September from a 3 ½ -year high of 59 the previous month. The index was still firmly in growth territory (above 50) of course, but economists were expecting a drop to just 58.5. Still, the latest dollar selling may just prove to be position-squaring ahead of key event risk in terms of today’s European Central Bank meeting and tomorrow’s US nonfarm payrolls report. The consensus is still bullish on the US dollar and it will take significant weakness in US economic data for this trend to reverse. In a reminder that one of the dollar’s key competitors – the euro – is facing quite a few problems of its own, the Eurozone manufacturing PMI also missed estimates yesterday.

Therefore it appears very possible that traders will look to take advantage of any dollar weakness to reinitiate long positions. Another point that should be monitored closely is the latest correction in risk assets and its effects on foreign exchange markets. The drop in US treasury yields as a result of falls in global stocks (including the US market) was also cited as a reason for the dollar’s weakness. If “risk off” persists, safe haven currencies – as well as gold– could rebound.