The US dollar fell on Monday after a senior member of the Federal Reserve said a cut in interest rates “may be warranted soon” as global trade tensions posed a risk to economic stability.
St Louis Federal Reserve President James Bullard said the Fed wouldn’t necessarily respond to every development in the US‘s disputes with trading partners, but the surprise announcement by US President Donald Trump to impose tariffs on Mexican imports which are deeply routed in the US economy would create “elevated uncertainty”.
Additionally, US Manufacturing PMI fell to 52.1 in May from 52.8 in April, missing estimates of 53.0 and marking the weakest pace of expansion since October 2016. Production growth dropped to the weakest level since August 2016 and the number of back orders fell for the first time since January 2017 as factory managers prepared for the trade war between the US and China.
With investors taking a more risk averse stance, the US dollar was sold off in favour of the safe haven Japanese Yen and Swiss franc. The dollar index which measures the dollar's relative strength again a basket of currencies fell 0.6% during the course of the day to a low of 97.11 but still remains around 1% up or the year.
The euro made headway against the US dollar, rising from 1.1164 to close at 1.1215 but remained under pressure elsewhere as investors remained cautious about the single currency after Eurozone manufacturing contracted for a fourth month, stoking fears of an ECB rate cut by the end of the year. The Swiss franc was able to capitalise on the weak euro sentiment and reached 1.1120, its strongest level against the euro since July 2017.
Meanwhile the pound continued its decline as investors continued to tread carefully, concerned about the future of the UK’s economy as fears of disruptive Brexit continue and UK Manufacturing PMI fell more than expected.
Manufacturing PMI fell to 49.4 in May from 53.1 last month, below market expectations of 52. This was the first month of contraction since July 2016 as new orders dropped to a near 3-year low and lower demand from Europe and Asia forced new export business to fall at the quickest pace in over 4½ years.
GBPEUR dropped from a morning high of 1.1326 throughout the day, eventually bottoming out a near 4½-month low of 1.1249.
GBPUSD opened at 1.2648 and dropped to a low of 1.2615, but with dollar’s own trouble the pound was able to recover to hit a high of 1.2674 in the evening.