- ISM Services PMI for May came in below the market expectation.
- The USD stays under selling pressure in the American session on Wednesday.
The business activity in the US service sector contracted slightly in May, with the Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) dropping to 49.9 from 51.6 in April. This reading came in below the market expectation of 52.
Other details of the report showed that the Prices Paid Index, the inflation component, rose to 68.7 from 65.1, while the Employment Index improved to 50.7 from 49.
Assessing the survey’s findings, “May’s PMI level is not indicative of a severe contraction, but rather uncertainty that is being expressed broadly among ISM Services Business Survey panelists,” said Steve Miller, CPSM, CSCP, Chair of the ISM Services Business Survey Committee.
“Respondents continued to report difficulty in forecasting and planning due to longer-term tariff uncertainty and frequently cited efforts to delay or minimize ordering until impacts become clearer,” Miller added.
Market reaction
The US Dollar (USD) stays under bearish pressure after this report. At the time of press, the USD Index was down 0.35% on the day at 98.90.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.