by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar tested levels near 1.5530 ahead of the New York opening on Friday. Volatility then spiked higher with new record dollar lows around 1.5685 after the Bear Sterns news before a recovery to 1.5610 in very choppy trading. The dollar was supported by some rumours that the central banks had been checking prices.
US consumer prices were unchanged in February while core prices were also static over the month compared with expectations of a 0.2% monthly increase with an annual 2.3% increase. The moderate data will increase speculation that the Federal Reserve will find it easier to justify a large interest rate cut at the forthcoming FOMC meeting.
The Fed will, however, be concentrating on the economy and financial sector in the short term. In this context, the developments surrounding Bear Sterns created additional volatility in US trading.
Bear Sterns announced that it had secured emergency liquidity through the Fed’s discount window via JP Morgan. Rumours surrounding the health of the bank has been building for days and this undermined the liquidity position as credit lines were cut. Following the news, there was some speculation that the Fed would cut interest rates by 1.0% next week to 2.0%.
The Bear Stern difficulties will reinforce market concerns over the financial sector and undermine dollar sentiment, although it will also maintain expectations that the healthy banks and Fed are taking steps to manage the situation. The Federal Reserve meeting will inevitably be a key focus next week with pressure on the Fed from several fronts.
Euro-zone inflation increased to an annual rate of 3.3% in February from 3.2% which will maintain ECB concerns over inflation. The bank will also be concerned over rapid Euro gains and Liebscher, for example, stated that he was very concerned over excessive volatility. Intervention speculation will continue, but the dollar weakened to 1.5650 later in US trading.
Yen
The dollar hit further resistance close to the 101.0 level in Asian trading on Friday and weakened back towards the 100.50 level.
Japanese officials continued to voice concerns over currency movements with Finance Minister Nukaga stating that the market was being watched with great interest. The warnings fell short of suggesting that intervention was imminent, but there will be market caution over the risk which may encourage some near-term consolidation.
Chinese markets will be watched closely due to speculation over a one-off revaluation of the currency and any move to push the yuan stronger would also provide some support to the yen.
Volatility levels increased sharply again in New York trade and, after another attack on the 101 region, the US currency weakened sharply to a low of 99.60 in very choppy conditions.
Sterling
Sterling was unable to gains any significant traction against the Euro during Friday and weakened to new record lows around 0.7725 in New York. Trading was very choppy against the dollar with a broad 2.0210 – 2.0395 range as wider volatility remained very high.
There was a further increase in Sterling market rates during Friday with 3-month Libor increasing to 5.93% from 5.84% the previous day and compared with the 5.25% official Bank of England base rate. The renewed increase in rates will create additional pressure for the Bank of England to cut interest rates to help alleviate the pressure. Deputy Governor Gieve stated that inflation expectations were key for the central bank.
There are also likely to be further fears over the financial sector which will also tend to undermine confidence in the UK economy and currency, at least in the short term.
Swiss Franc
The Euro found some support below the 1.57 level against the Swiss franc on Friday, but struggled to make much headway. There was a high degree of volatility against the dollar with the Swiss currency weakening to lows around 1.0140 before strengthening rapidly to record levels beyond parity.
The Swiss franc will tend to gain fresh support from renewed fears over the US economy and global credit markets. Volatility levels are liable to remain high in the short term with the franc around 1.0020 later in US trading.
Source: VantagePoint Software, Market Technologies, LLC
Australian dollar
The Australian dollar pushed to highs above 0.9450 against the US currency in local trading on Friday. There were no major domestic data releases and the Australian dollar gained support from the high degree of yield support. The currency was also underpinned by the strength of commodity prices with gold at a record high.
Levels of risk aversion will still tend to unsettle the currency and will limit the scope for gains. Volatility remained a key feature and the Australian dollar weakened back to lows around 0.9350 in US trading as volatility remained a key feature.
