EUR/USD

The Euro weakened in early Europe on Wednesday  with a Standard & Poor’s warning over the risk of further credit-rating downgrades within the Euro-zone pushing the currency to a low near 1.43 against the dollar.

Euro-zone money supply declined 0.2% in the year to November while private loans fell 0.7%. The continuing weakness in monetary growth will maintain pressure for the ECB to maintain an expansionary monetary policy during 2010.

The Chicago PMI index rose to a three-year high of 60.0 for the December reading which will maintain some optimism over the US growth prospects early in 2010. The US currency is still being driven to a greater extent by yield considerations and the firm data will offer some degree of support for the US currency, especially as there will be some increased speculation that the Federal Reserve will be in a stronger position to increase interest rates during the first half of 2010.

The latest IMF data recorded a decline in the dollar share of global foreign exchange reserves to 61.6% in the third quarter from 62.8% previously which will maintain underlying fears over longer-term diversification away from the US dollar.

Market liquidity was low during the day and this maintained the risk of choppy trading conditions. The Euro retreated to a low of 1.4275 after the US data before rallying back to 1.4330 as liquidity levels remained low. Trading volumes will be very low of Thursday which will maintain the possibility of erratic trading.

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Yen

The pattern of a firm US currency was maintained in Asia on Wednesday with a dollar peak close to 92.25 with some year-end demand for the US dollar.

The yen was also undermined by a Standard & poor’s warning that Japan could be vulnerable to a ratings downgrade in the medium term unless there was greater action to curb the deficit. The yen still gained some degree of protection from unease over the situation in Dubai which curbed aggressive yen selling and the dollar consolidated near 92 in early Europe on Wednesday. 

Year-end position adjustment could trigger erratic moves and the dollar pushed to a three-month peak around 92.75 against the yen following the Chicago PMI data before consolidating around 92.40.

Sterling

Sterling initially remained under pressure in Europe on Wednesday with a low below 1.5850 against the dollar while the Euro pushed to a high near 0.9050 as underlying confidence in the currency remained weak.

There was a covering of short positions later in the day which pushed the currency sharply higher. There was a significant UK currency advance against the Euro back to 0.8915 while Sterling pushed to a high near 1.61 against the US dollar as stop-loss positions were triggered.

There will again be the risk of erratic trading on Thursday, but underlying sentiment is still liable to remain very fragile given underlying vulnerability.

Swiss franc

The dollar pushed to a high of 1.0420 against the franc on Wednesday before retreating to 1.0370. The Swiss currency maintained a generally firm tone against the Euro despite a brief Euro push towards the 1.49 level.

There was no evidence of National Bank intervention during the day, but markets will remain very sensitive to rumours in the short term.

The Swiss KOF index strengthened to 1.68 for November from 1.62 the previous month which will lead to some speculation that the recovery is slowing.

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Australian dollar

The Australian dollar drifted weaker to lows near the 0.89 level against the US currency in local trading on Wednesday in generally subdued conditions.

Underlying confidence in the Australian economy should remain generally firm in the short term and this should also lessen the risk of heavy selling pressure on the currency. The Australian dollar consolidated near 0.8930 later in the US session as risk appetite remained generally solid.