Service Sector Suffering Due to Dollar Weakness

By Paul Quintaro
Benzinga Staff Writer

The ISM Non-Manufacturing Composite for the month of November printed at 52.0 Monday, down from the prior reading of 52.9 and well below expectations of 53.8. The reading is a broad-based assessment of the state of the service sector in the US.

Of its subcategories, the reading for employment came in below 50—indicating a contraction. This contrasts with last week’s employment data, which indicated that the unemployment rate in the US had fallen below 9%.

Of course, this data may fit in with the recent growth in manufacturing seen in the US, perhaps on account of currency fluctuations.

As the US dollar has weakened against other currencies, exports in the US may have benefited while individuals’ consumption may have taken a hit. A weaker dollar means less purchasing power for US consumers, and therefore the money they have to spend on services may be restricted.

For its part, manufacturing has been seen to be enjoying somewhat of resurgence, as US car manufacturers have demonstrated new life in recent improving sales figures.

The dollar index traded down earlier Monday, dropping roughly 0.5%. The primary cause of the shift in the index may have been a strengthening of the euro against the dollar, as the EUR/USD pair moved up nearly 0.60%.
Forex traders may have had their concerns alleviated about a possible euro collapse.

In recent months, more and more concern has built up over the fate of the euro. In a joint press conference on Monday, Germany and France’s leaders—Angela Merkel and Nicolas Sarkozy—came together to state that they had come to an agreement on a new treaty for the European Union.

That new agreement would not include Eurobonds, but would include measures to ensure that member states kept their budgets in check. It could also make changes that would allow the European Central Bank to purchase the bonds of indebted member states.
Of course, in a somewhat ironic fashion, a stronger euro may prove to be fatal for the Eurozone.

A strengthening euro means that the debt burden of member states is made heavier. As the member states are struggling under their current debt burdens, a stronger euro would only make their situation worse, as well-known economist Nouriel Roubini noted last week.

Still, if the ECB is now going to purchase bonds, it may drive the euro lower. With more euros in circulation, the value of the euro may be made weaker.
Other central bankers could resist euro depreciation. The Swiss National Bank and Bank of Japan have already taken steps earlier in the year to drive down the value of their currencies, as investors may have shifted their holdings to shield themselves from a loss.

It will be interesting to see where the euro trades from here. Should a new agreement be formed, two conflicting forces—weakening due to bond purchases, but also strengthening due to relief about the potential of a collapse—could whipsaw the euro. If a new agreement cannot be formed, and the situation continues to deteriorate, the euro could continue to trade lower.

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