US Dollar Resists Weakness Despite Mixed Data

The US dollar (USD) managed to hold its ground against most of its major peers on Friday, despite a mixed bag of economic data that raised doubts about the strength of the US recovery and the pace of the Federal Reserve’s policy tightening.

US Jobs Report Falls Short of Expectations

The most anticipated data release of the week was the US nonfarm payrolls report for August, which showed that the US economy added 187,000 jobs last month, missing the consensus forecast of 170,000. The previous month’s figure was also revised down from 157,000 to 157,000.

US Dollar Resists Weakness Despite Mixed Data
US Dollar Resists Weakness Despite Mixed Data

The unemployment rate ticked down to 5.2% from 5.4%, but the labor force participation rate remained unchanged at 61.7%. The average hourly earnings rose by 0.2% month-over-month and 4.3% year-over-year, below the expectations of 0.3% and 4.5%, respectively.

The disappointing jobs report suggested that the Delta variant of the coronavirus and the supply chain disruptions have taken a toll on the US labor market recovery, which could delay the Fed’s plans to taper its asset purchases and raise interest rates.

ISM Manufacturing Index Surprises to the Upside

However, not all the data was gloomy for the greenback. The Institute for Supply Management (ISM) manufacturing index for August came in at 47.6, beating the forecast of 46.4 and rising from 46.4 in July. The index remained below the 50 threshold that separates expansion from contraction, but showed some signs of improvement in the US manufacturing sector.

The most notable component of the index was the prices paid sub-index, which jumped from 42.6 to 48.4, indicating that inflationary pressures are still elevated in the US economy. The Fed has repeatedly said that inflation is transitory and will ease as the economy reopens, but some market participants are skeptical about this view.

US Dollar Index Ends Week Higher

The mixed data had a muted impact on the US dollar index (DXY), which measures the greenback’s performance against a basket of six major currencies. The DXY ended Friday slightly higher at 1,235.89, after hitting a weekly low of 1,231.64 earlier in the session.

The DXY also posted a weekly gain of 0.15%, snapping a six-week losing streak that had pushed it to a more than one-year low of 1,228.94 in mid-July.

The DXY’s resilience reflected the fact that the US dollar still enjoys a relative advantage over its peers in terms of interest rate differentials and safe-haven appeal. The Fed is still expected to be one of the first major central banks to normalize its monetary policy, while other countries are struggling with rising Covid-19 cases and slower growth.

The DXY’s outlook will depend largely on how the Fed reacts to the latest data and whether it will signal any changes to its tapering timeline at its next meeting in September. The market is currently pricing in a less than 50% chance of another quarter-point rate hike this year, down from about 75% earlier this week.

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