The DXY Index depreciated by 0.4% to 98.8 overnight on weak US data. The sell-off in the USD started after ADP Employment fell sharply to 36k in May vs. the 114k consensus, holding below 100k for the third time in four months. The second bout of USD weakness was triggered by the ISM Services PMI falling below the breakeven 50 level (actual was 49.9) in May, bucking the consensus for a rise to 52 from 51.6 in April. The weakness in the service sector was driven by new orders falling sharply to 46.4 from 52.3. While employment rose to 50.7 from 49, prices paid increased again to 68.7.
The stagflation tone of the ISM Services PMI aligned with the Fed’s Beige Book findings. The Fed reported that the US economy contracted slightly since the previous report on April 23 due to tariff-related uncertainty holding back business and consumer activities. The Fed’s 12 districts witnessed lower labour demand, declining hours worked and overtime, hiring pauses, and staff reduction plans. Although prices rose moderately, a few districts expected the higher tariff rates to add significant pressure to costs and prices in the future. Although May was also the first time since June 2024 that both the ISM services and manufacturing PMIs contracted, the Fed lacked the disinflation scenario that led to the rate cut in September 2024.
US President Donald Trump seized upon the weaker-than-expected ADP data to pressure Fed Chair Jerome Powell to lower rates. The Fed enters a blackout period next week before its FOMC meeting on June 18. The futures market expects the Fed to cut rates later in September, taking its cue from Fed speakers needing more clarity on Trump’s policy trajectory before committing to rate cuts. For example, the tariff outlook is clouded by the trade court’s ruling against Trump’s unlawful use of the International Emergency Economic Powers Act (IEEPA), while more countries are weighing retaliation. Trump’s One Big Beautiful Bill faced resistance from lawmakers, jeopardizing the administration’s goal to pass it by Independence Day and resolve the debt ceiling before the projected X-date as early as August. Hence, pay attention to the upcoming US jobs data. If today’s initial jobless claims mirror last week’s higher-than-expected readings, tomorrow’s nonfarm payrolls could surprise by falling faster below the 126k consensus in May from 177k in April.
The DXY’s relationship with the US Treasury 30Y yield has become unhealthy. DXY weakened when the long bond yield threatened to rise due to US fiscal sustainability worries or depreciated like yesterday on waning exceptionalism in the US economy. With the 30Y yield declining for the first time in four days by 10.4 bps to a three-week low of 4.878% overnight, downside risks in the DXY could increase if it takes out the support level of 98.
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“Military power wins battles, but spiritual power wins wars.”
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