Dollar dips as US services growth and factory orders slow

The dollar dipped on Tuesday after data on Monday showed slowing growth in the services sector and lower than expected factory orders.

A week ahead of the Federal Reserve's next monetary policy meeting, investors expressed doubts over the likely duration of the central bank's current rate-hike cycle as the economic outlook became more clouded.

ISM services index

Institute for Supply Management data showed growth in the US services sectors slowed in May, with the ISM index – the equivalent of purchasing manager indexes in Europe – slipped to 56.9 from 57.5 in April.

Analysts had forecast a dip to 57. An above 50 reading indicates economic expansion.

Indeed – economists reflected that activity in the services sector remained robust in May despite the slight slowdown.

Janet Yellen, Federal Reserve chair: The FOMC is still seen raising rates in a week despite recent run of data - Source: Wikimedia Commons

Andrew Hunter at Capital Economics said: "Despite the small fall in the ISM index in April, it remains at a decent level by past standards and provides another reason to expect GDP growth to rebound in the second quarter."

Factory orders dip

Factory orders fell 0.2% in April after rising by 1% in the previous month, the Commerce Department reported. A poll of economists had forecast the 0.2% fall.

The string of slightly weaker data followed Friday's employment numbers, which came in below par.

Just 138,000 jobs were created in the US in May, sliding from a downwardly revised 174,000 in April, and missing expectations of 185,000.

Dollar slips

As the dollar fell on Tuesday – down 0.1% to $1.1248 against the euro and 0.7% lower to Y109.70 versus the yen – analysts considered what the data meant for the outlook on growth and interest rates.

"Our economists foresee a slowdown rather than a hard landing," said analysts at Bank of America Merrill Lynch, citing the still solid levels of ISM indexes despite recent dips in the rate of growth.

On Wednesday 14 June, the Fed's open market committee is expected to raise the main Fed funds rate by a quarter of a percentage point to 1.25%. The picture beyond this, however, has become clouded.

BoML analysts added: "After Friday's payrolls, the rates market is now pricing in just three more hikes to end 2019, including June."