The dollar was unable to sustain the gains beyond 1.2050 against the Euro and weakened back to beyond 1.21 in New York. There is likely to be further institutional and central bank Euro buying close to the 1.20 level against the dollar and this will represent an important source of background Euro support. The Euro was holding firm close to 1.2150 in early Europe on Tuesday.
The US ISM index for the manufacturing sector was weaker than expected with a decline to 55.2 in March from 56.7 the previous month. There was a small increase in the prices component over the month, but the employment index fell. There was a drop in pending home sales of 5.2% in the year to February which will maintain some doubts over underlying growth trends in the housing sector. Uncertainty will still be a dominant factor and markets will be looking for guidance from Fed officials with several officials due to speak during Tuesday.
Although not directly comparable, the Euro will gain support from the fact that Euro-zone PMI index was higher than the equivalent US index. Bond yields in the US and Germany continued to increase on Monday, but the gap between the US and German yields narrowed slightly after the US ISM data and this will tend to underpin the Euro. Given that markets are expecting the Fed funds rate to increase to at least 5.0%, the dollar is still very vulnerable to any downward revision to US interest rate expectations.
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