Dollar rebounds as ISM PMI beats, euro zone PMI at 51.9

The dollar rebounded Monday as the U.S. ISM Manufacturing PMI exceeded estimates, calming currency markets after recent intervention in the USD/JPY pair. The greenback gained ground across major pairs, pressuring EUR/USD, GBP/USD, and USD/CAD as traders reassessed the resilience of U.S. manufacturing.

"Euro zone factories are enjoying something of a summer growth spurt... However, there are signs that this good news may prove short-lived, with momentum at risk of fading as autumn approaches," said Chris Williamson, chief business economist at S&P Global Market Intelligence, in a survey released the same day.

The euro zone's S&P Global Manufacturing PMI rose to 51.9 in July from 51.4 in June, its highest reading since April but just below a preliminary estimate of 52.0. An output index bounced to 52.9 from 51.7, the highest since March 2022. Yet new orders rose only marginally, with export orders falling in France, Spain, Italy and Austria, suggesting factories are clearing backlogs rather than winning new business. Factory employment fell again in July, extending a run of job cuts as companies grew cautious about a slowdown in work.

The ISM beat complicates the Federal Reserve's policy calculus. With euro zone inflation ticking up to 2.9 percent in July from 2.8 percent and three ECB policymakers flagging the need for potential rate hikes in response to the Iran war, the dollar's strength could persist. A firmer dollar pressures commodities priced in the currency and weighs on multinational earnings, while the Bank of Japan's recent intervention in USD/JPY adds another layer of uncertainty.

Backlog-Driven Growth Masks Weak Demand

The euro zone's headline PMI masks a fragile recovery. Firms completed backlogs of unfinished work at the steepest rate since January, and input cost inflation eased to a five-month low in July. Factory gate prices rose at their softest pace since March, reflecting weak pricing power. Business confidence edged up to its highest since February but remained below its long-run average. Supply chain pressures linked to the ongoing Middle East conflict remained elevated but were the least acute in five months.

The divergence across major economies is stark. Japan's factory output surged to a near 12-year high in July, while India's factory growth fell to a near five-year low on weaker demand. The euro zone economy grew 0.4 percent last quarter, faster than expected, supported by AI spending and confident consumers. These contrasting readings show how uneven the global manufacturing recovery remains, with the U.S. and Japan leading while Europe and India lag.

For the dollar, the ISM beat suggests the U.S. manufacturing sector is holding up better than peers. If the Fed sees resilience in the data, it may hold rates higher for longer, widening the yield differential that has supported the dollar. The Bank of Japan's intervention in USD/JPY, however, creates a two-way risk: further intervention could cap dollar gains against the yen even as the greenback strengthens elsewhere. The dollar index's rebound from recent lows reflects this dynamic, with traders pricing in a more hawkish Fed path than was expected just a week ago.

The last time the euro zone PMI printed above 51.9 was in April, when the index reached its highest level before slipping in May and June. That pattern of a brief expansion followed by softening suggests the current reading may not signal a sustained recovery. Similarly, the ISM beat comes after months of mixed U.S. factory data, and one strong month does not establish a trend.

The next test comes with the Fed's September meeting, where policymakers will weigh the ISM reading against inflation data. If the dollar's rebound extends, emerging-market currencies and commodities priced in dollars face renewed pressure, while U.S. multinationals with overseas revenue could see earnings headwinds in the second half. For forex traders, the key question is whether the Bank of Japan intervenes again if USD/JPY resumes its climb, which would create a divergence between dollar strength against the yen and against other major currencies. The ECB's September meeting follows a week later, and any hawkish signal from policymakers in Frankfurt would reinforce the dollar's relative yield advantage.

This article is for informational purposes only and does not constitute investment advice.