(Witthaya Prasongsin/Getty Images)

The dollar fell to a three-week low on Monday after data showed the US economy is slowing down with weaker-than-expected readings on manufacturing and construction spending, suggesting that the Federal Reserve is on track to start cutting interest rates this year.

The rand gained 1.4%, benefitting from the dollar weakness, while it also managed to claw back some of its recent losses as the dust starts to settle on local elections, said Shaun Murison, senior market analyst at IG Markets.

“The rand’s rebound from oversold conditions comes in the wake of coalition talks and perhaps shows some optimism that more conservative business friendly alliances are likely to be formed rather than those leaning towards leftist policy.”

This weekend, News24 reported of informal discussions between the DA and those close to president Cyril Ramaphosa’s camp in the ANC.

The rand spiked from R18.24/$ to almost R18.90 last week as the ANC’s dismal election results raise fears that it would form a coalition with the market-unfriendly EFF or MK Party.

On Monday evening, the rand was trading at R18.51.

“While volatility in the domestic currency is likely to continue, a move below the R18.60/$ level could signify on a technical basis that R18.30/$ becomes a feasible short term target for the currency pair,” said Murison.

The US dollar fell to a two-week low against the yen following the data and was last down 0.6% at 156.245. The euro gained 0.3% to $1.0879, pushing the dollar index, a measure of the U.S. currency’s value versus six major currencies, down 0.3% as well to 104.24.

The index earlier dropped to a three-week low of 104.22. The US Institute for Supply Management (ISM) said its purchasing managers index (PMI) for manufacturing fell to 48.7 in May , from 49.2 in April, sliding as well from an 18-month high of 50.3 seen in March. In a research note, BMO pointed out that the U.S. manufacturing sector in May shrank for the eighteenth time in the past nineteen months. Monday’s ISM decline followed weakness in the Chicago PMI, Dallas Fed, Philadelphia Fed indexes, and the Empire State manufacturing indexes.

US construction spending also slid unexpectedly for a second consecutive month in April, decreasing by 0.1% after a 0.2% decline in March, amid falls in non-residential activity.

“The US manufacturing sector is expected to remain under pressure until the Fed starts to loosen monetary policy in the fall,” wrote Jay Hawkins, senior economist at BMO Capital Markets in a research note. After the ISM and construction spending data, fed funds futures increased the chances of a rate cut in September to around 59.1%, according to LSEG’s rate probability app, compared with around 55% late Friday. It was slightly below 50% earlier last week.

The US dollar posted its first monthly decline of the year in May, weighed down by shifting expectations on when the US central bank will cut rates and by how much. The futures market is fully pricing in one rate cut of 25 bps this year. “It’s pretty clear that the Fed is going to be on hold for a while,” said Brad Bechtel, global head of FX, at Jefferies in New York.

“The US data matters but they’re probably not going to move the needle.”

“The dollar (index) is going to be trading in a range, at least for the remainder of the year, which is going to be in the 103-107 area. For the next couple of weeks, we might just hold in the 104-105 range.”

In other currencies, the Mexican peso weakened on Monday after the ruling party declared Claudia Sheinbaum the winner of the presidential election by a “large margin” after polls closed on Sunday. “The peso is underperforming amid seemingly growing concerns amongst investors that by securing supermajority in the lower house the governing coalition could be tempted to implement non-market-friendly policies,” said Piotr Matys, senior FX analyst, at In Touch Capital Markets.