by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar remained under pressure in European tradingon Tuesday and dipped through the 1.60 level to a fresh record low near 1.6040.
The German ZEW confidence index weakened to -63.9 in July from -52.4 which will reinforce Euro-zone fears and initially helped pull the Euro from its highs. The weak survey evidence will also increase pressure for measures to limit further Euro gains and comments from European officials will be watched very closely.
US retail sales rose a headline 0.1% with a 0.8% core increase and, although both figures were marginally below expectations, there was little impact. Producer prices rose 1.8% over the month to give a 9.2% annual increase while there was a more moderate 0.2% core increase for the month.
In testimony to Congress, Fed Chairman Bernanke reinforced the message that the US economy faces major difficulties with downside growth risks. He also pointed to increased inflation risks and stated that the outlook was highly uncertain.
Bernanke was generally downbeat over growth prospects with further concerns over the housing sector. Although 2008 GDP growth estimates were actually revised up slightly, expectations of higher interest rates continued to fade.
The dollar initially weakened after Bernanke’s testimony with a further Euro attack on levels above 1.60. The US currency regained ground later in US trading as oil prices fell sharply and Wall Street attempted to rally from initial losses. Unease over the dollar and Euro is liable to be an important short-term focus.
Yen
Financial confidence remained fragile in Asia on Tuesday with the Japanese stock market dipped to a 15-week low.
The Bank of Japan held interest rates at 0.50% following the latest council meeting. There is still evidence of a shift of funds into overseas high-yield instruments which will tend to limit the scope for Japanese currency gains. A wider increase in risk aversion pushed the yen stronger in Europe and the dollar subsequently weakened sharply to lows around 104.15 in early New York before a recovery.
Significantly, the yen was able to regain ground sharply against the Euro with a move to 166.50. The fact that the Japanese banking sector has not been significantly affected by the globalcredit crisis will offer some Japanese currency support.
Sterling
The latest UK RICS house-price survey recorded a slight recovery to -88.0% in June from -92.2% the previous month. Transactions, however, were at a record low which indicates activity remains very weak which will have an important negative impact on the economy.
The BRC retail sales survey also recorded a 0.4% decline in like-for-like sales in the year to June. The UK currency was still holding firm against the dollar in early Europe on Tuesday. More widespread dollar losses pushed the UKcurrency to 3-month highs above 2.0100.
UK consumer inflation rose further to the highest rate for over 15 years at 3.8% in June from 3.3% the previous month while the annual core inflation rate rose slightly to 1.6% from 1.5%. The central bank faces very difficult policy choices which will lead to volatile trading conditions as sentiment swings sharply. Comments from Bank of England officials will be watched very closely to assess whether the bank looks to push markets towards expecting an interest rate increase.
The latest unemployment data will also be watched closely on Wednesday for further evidence on the economy. Sterling strengthened to 0.7935 against the Euro in US trading and drifted weaker to 2.0030 against the dollar.
Swiss Franc
Overall risk appetite dipped again on Tuesday which boosted the Swiss currency. The franc strengthened to 3-month highs near parity against the dollar and pushed to 1.6030 against the Euro.
Financial-sector de-leveraging is liable to persist which will tend to support the franc.
There will, however, also be fears over the Swiss banking sector which will tend to unsettle the franc, especially if there are reports of furtherdebt write-downs.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
In the latest set of minutes, the Reserve Bank of Australia stated that monetary policy was cooling demand and this will dampen any speculation that the central bank will need to increase interest rates further. The Australian currency will still gain support from the existing yield spreads, especially with reduced speculation that the Federal Reserve will increase rates.
Wider US currency losses pushed the Australian currency to a fresh 25-year peak above the 0.98 level with a peak of 0.9850. Nevertheless, there are clear risk of complacency over the situation and the currency retreated back to below 0.98 in US trading as commodity prices dipped sharply.
