EUR/US$

The Euro was unable to push above the 1.4150 level against the dollar on Friday as sell orders remained concentrated in this region. The dollar strengthened to highs around 1.4065 ahead of the US data releases as risk appetite was slightly weaker.

Markets were uneasy over the implications of any CIT bankruptcy, especially as there could be a negative impact on credit to companies which would jeopardise economic recovery prospects.

The US housing data was stronger than expected with starts rising to an annual rate of 0.58mn for June from a revised 0.56mn the previous month and this was the strongest figure since October. Permits also rose to an annual rate of 0.56mn which will maintain optimism that the sector has passed through the weakest point.

The housing data helped underpin risk appetite which also lessened demand for the dollar. There was also some speculation that CIT would be able to avoid bankruptcy as talks with the banks continued. The US earnings reports were also generally favourable which helped underpin confidence.

The US currency was unable to strengthen through the 1.4050 level and edged weaker to 1.4110 later in New York

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Yen

A government panel warned on Friday over the potential deflation risks within the economy and these fears will maintain Finance Ministry unease over the implications of yen strength.

Technically, the dollar may be vulnerable to renewed selling pressure if it is unable to sustain the recovery back above the 93.60 support region and the yen was close to this level on Friday. Risk appetite was dampened by bomb explosions in Indonesia and fears that US lender CIT would file for bankruptcy on Friday.

The dollar found support close to the 93.50 level in the US session and was able to recover to 94.20 as risk appetite staged a tentative recovery. Markets will remain on high alert for any verbal intervention by Finance Ministry officials.

Sterling

Sterling hit selling pressure above 1.64 in European trading on Friday and weakened significantly ahead of the US open with lows around 1.6265. The UK currency was unsettled by the IMF warnings from Thursday as markets took a close look at the debt issue. There was also some speculation that the economy could be hit by the escalating swine-flu outbreak.

Degrees of international risk appetite remained important for Sterling direction with selling pressure enhanced when global confidence faltered. Sterling was able to recover to the 1.6350 region in New York as confidence stabilised while there was also a recovery to 0.8620 against the Euro from 0.8660.

There will still be important fears over the debt outlook, especially if there is evidence that the economic improvement is stalling as this would further increase pressure on the fiscal situation.

Swiss franc

The dollar resisted a serious test of support close to 1.07 against the franc on Friday, but was unable to sustain a brief move above the 1.08 level while the franc was marginally weaker against the Euro.

The Swiss currency is likely to lose some support if there is a sustained improvement in risk appetite, although the impact may remain mixed as has been the case over the past few sessions.

The risks of National Bank intervention will increase sharply if the US currency loses further ground against the franc.

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Australian dollar

The Australian dollar pushed to a high near 0.8080 before sliding in local trading on Friday. There was pressure for a correction after recent rapid gains and there was a generally more cautious tone towards risk. The currency was still able to avoid substantial selling pressure as commodity prices remained firm.

Underlying confidence should remain firm in the short term and the Australian currency edged firmer later on Friday, although it struggled to make any significant headway above the 0.80 level against the US dollar.