by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was unable to make any significant headway before the German IFO release on Wednesday and then weakened sharply following the data.
The IFO survey was stronger than expected with an increase to 103.5 in May from 102.4 the previous month and this will reinforce near-term confidence in the German economy. The data will also support the Euro in the short term as it will make it easier for the ECB to maintain a tough policy stance. The comments from IFO President Nerb were still relatively cautious and he stated that the ECB should have scope to lower interest rates later in 2008. These comments should dampen Euro demand to some extent.
The US currency was also undermined by a fresh surge in oil prices during the day with crude pushing to a new record above US$130 per barrel. The correlation between oil prices and the dollar has been a very important factor over the past few weeks and volatility is liable to increase in the short term.
Minutes from the April FOMC meeting confirmed the impression that the Fed will look to keep interest rates steady in the short term and resist further rate cuts. Some members stated that rates would not be cut even if the economy contracted. The dollar will take some comfort from the Fed’s stance, but the impact will be lessened by a further downgrading of 2008 growth forecasts.
The dollar strengthened briefly following the minutes, but then weakened again to lows near 1.58 as equity markets declined and there was a further surge in oil prices. Markets will need to be on high alert for G7 rhetoric on energy prices and the dollar as they will want to avoid further destabilising moves.
Yen
The US currency drifted towards the 103.0 level in early Europe on Wednesday before finding support while the yen was able to resist heavy losses against the Euro.
There were no significant domestic developments with the government leaving its assessment of the economy unchanged.
The dollar was unable to make any significant headway during the day and the US currency re-tested the 103.0 region in New York as Wall Street dipped sharply. The yen will continue to gain some support if there is a sustained decline in equity markets. Overall interest rate spreads have still tended to narrow which will lessen the risk of aggressive Japanese currency buying.
Sterling
Sterling struggled against the dollar for much of Wednesday, although it did push towards 1.97 in New York. The UK currency substantially underperformed the Euro and weakened to lows beyond 0.8030 before a slight corrective recovery.
The Bank of England voted by an 8-1 margin for unchanged interest rates at the May meeting with Blanchflower voting for an immediate cut in rates to 4.75%. The majority of members wanted the bank to concentrate on inflation risks, especially as they were concerned that a cut at the meeting would give a signal that the bank was concentrating on growth considerations at the expense of inflation.
The overall MPC stance will offer some near-term support to the UK currency as it will reinforce yield support. The latest government borrowing data was also better than expected which will offer some near-term relief, but there will still be major fears over the economy as recession fears are liable to increase.
Swiss Franc
The Euro was unable to regain the 1.63 level against the Swiss franc on Wednesday and weakened to lows around 1.62 in US trading. Wall Street dipped sharply during the day which boosted immediate franc demand. The dollar was unable to regain the 1.04 level and weakened to lows around 1.0250.
The Swiss currency will gain further near-term support if there is a sustained decline in equity prices as defensive demand for the franc would increase. Franc gains should still be measured unless there is a renewed increase in credit-related fears.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian dollar has remained firm over the past 24 years with fresh 24-year highs above the 0.96 level against the US dollar. Domestically, there was a recovery in the Westpac consumer confidence index which boosted confidence in the economy and reinforced yield appeal.
Commodity prices have also remained robust over the past 24 hours which will also tend to support the Australian currency, especially after crude oil prices pushed to a new record high. Investor sentiment will also remain positive in the short term, although there will remain a high risk of a sharp correction. General US dollar weakness allowed the Australian dollar to hold above the 0.96 level in New York.
