by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar weakened to lows near 1.5945 in European trading on Tuesday before consolidating close to 1.59 in early US trading.
The US currency then regained ground with a sharp advance to highs near 1.5760. The dollar was supported by a sharp decline in oil prices which dipped to lows near US$127 per barrel.
Regional Fed President Plosser stated in comments on Tuesday that interest rates should be increased sooner rather than later given thatinflation is too high. The hawkish comments provided additional support to the dollar with markets pricing in a near-50% chance of an interest rate increase by September.
The US corporate earnings were again an important market factor with the currency initially unsettled by disappointing results from the Wachoviabanking group, but stocks subsequently rallied which provided currency support as short positionswere unwound.
The USeconomic datareleases did not have a significant impact with the Richmond Fed index weakening further to -16 in July from -12 the previous month. There was also a reported 0.3% decline in nationalhouse pricesfor May, although this was a smaller than expected monthly drop. The Beige Book will be watched closely on Wednesday for further evidence on potential Fed thinking.
There was a further decline in Italian consumer confidence which will maintain fears over the Euro-zone economy and unease will increase if there is a slide in Frenchconsumer spendingreported on Wednesday.
Yen
Domestically, there was a 0.4% increase in the all-industries index reported on Tuesday, but this failed to have a significant impact with low confidence in the Japanese economy.
There will be further interest in overseas high-yield investmentswhich will tend to keep the yen on the defensive with any rallies likely to attract significant selling. The dollar was holding around 106.50 on Tuesday while the yen remained near record lows beyond 169.50 against the Euro.
The dollar challenged levels above the 107.0 level in New York with a peak close to 107.50 as US financialstocks rallied. Trends in US financial stocks will remain an important influence on near-term direction with any further gains unsettling the yen.
Sterling
Sterling pushed to highs near 2.0080 against the dollar in Europe on Tuesday before weakening sharply to lows just below 1.99 as the US currencyrallied. The UK currency also secured a firmer tone against the Euro with gains to 0.7925.
Markets will be cautious ahead of the MPC minutes on Wednesday to assess whether there is any support for higher interest rates or whether there is evidence of growing support for Blanchflower’s views that rates should be cut aggressively which would hurt the currency.
There will also be apprehension over the latest national monthly sales data which is due for release on Thursday. There will be expectations of a sharp decline following the surprise surge in sales last month.
There will still be some Sterling support from an easing of immediate fears surrounding the global financial sector and renewed interest in carry trades.
Swiss Franc
The Swiss currency strengthened in European tradingon Tuesday with gains to 1.0135 against the dollar and 1.6155 against the Euro.
Trends reverse sharply in New York with the franc weakening to lows around 1.0335 against the dollar and 1.63 against the Euro. The sharp decline in oil pricesboosted risk appetite which also lessened immediate demand for the Swiss currency, especially as financial stocks rallied. Renewed appetite for high-yield instruments will tend to undermine the franc in the very short term with volatility liable to increase.
Domestically the trade surplus pushed to a record CHF2.41bn for June which will offer some franc support even though underlying export growth was still slowing.
Source: VantagePoint Intermarket Analysis Software
Australian Dollar
The Australian dollar has been trapped within relatively narrow ranges over the past 24 hours with no test of support below 0.97 against the US dollar. It was also unable to challenge the 0.98 level with the currency holding around 0.9760 on Tuesday.
Domestically, the Wednesday consumer inflation data will be very important for interest rate expectations. A stronger than expected reading would underpin the currency while a weak set of data would reinforce expectations that interest rateshave peaked. The Australian currency should still gain some underlying support from an inflow of fundson existing yield grounds, especially if risk appetite remains slightly firmer.
Lowercommodity pricesand a firmer US dollar still pushed the Australian dollar to lows below 0.97 in US trading.
