by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to fresh all-time lows in Europe on Thursday at 1.5910, but then rallied strongly.
As expected, the ECB left interest rates at 4.00% following the latest council meeting. In the press conference following the decision, ECB President Trichet again pointed to short-term inflation pressures and re-iterated its determination to avoid secondary inflationary pressures. The comments were broadly in line with recent remarks made by ECB officials. Some increase in concerns over growth sparked speculation that the bank was shifting towards preparing the markets for an interest rate cut later in 2008.
Trichet repeated his opposition to excessive currency moves. In this context, markets will watch comments from G7 officials very closely on Friday and during the weekend at the annual IMF meetings in Washington.
The US trade deficit rose to US$63.2bn in February from a revised US$59.0bn the previous month. The export performance was firm, but imports also rose significantly.
The jobless claims data came under close scrutiny following the sharp jump seen last week. There was a decline to 357,000 from a revised 410,000 previously which will ease immediate fears over the labour market and the dollar pushed back to 1.5740. The US currency will, however, need a series of indicators suggesting some resilience before securing any decisive improvement in sentiment.
The yen secured strong buying support in Asian trading on Thursday and the dollar tested support near the 100 level in European trading.
Investor confidence in global markets faltered and the increase in risk aversion triggered fresh defensive demand for the Japanese currency, especially with stock markets weak. Regional currency trends were also important as the Chinese yuan strengthened through the 7.00 against the dollar while the Singapore MAS tightened monetary policy to combat inflation. Gains in these currencies provided background support to the Japanese yen.
Domestically, core machinery orders fell 12.7% in February, but this followed a sharp increase for January and there was a small increase on an annual basis. Overall confidence in the domestic economy remains fragile which is likely to curb yen support with steady investment flows overseas.
There was a significant recovery in risk appetite in New York trading and the dollar was able to rally strongly back to 101.90.
The UK currency tested record lows against the Euro on Thursday with a trough around 0.8030 while Sterling was unable to hold above 1.98 against the dollar.
As expected the Bank of England cut interest rates by 0.25% to 5.00% following the latest monetary Policy Committee meeting. The bank stated that it expects inflation to fall later in 2008, especially as some spare capacity could emerge. The bank was concerned over the tightening of credit standards.
As credit fears persist, there will be expectations of a steady stream of interest rate reductions over the next few months which will tend to undermine Sterling support.
The visible UK trade deficit was GBP7.5bn for February from a revised GBP7.9bn in January. The mix of subdued exports and lower imports will tend to be a slight negative factor for Sterling. There will, however, be some optimism over merger-related flows after the RWE bid for British Energy and Sterling rallied to 0.7980 against the Euro.
The franc strengthened sharply to highs beyond the 0.99 level against the dollar and also pushed to around 1.5715 against the Euro. The Swiss franc gained support form a renewed spike in risk aversion in Asian and European trading on Thursday as European equity markets dipped sharply.
There was some recovery in conditions in US trading as Wall Street rallied and the franc retraced gains. Losses accelerated later in the day with the franc registering net losses on the day.
Overall credit-market conditions still appear more favourable and this should lessen aggressive demand for the Swiss currency.
The Australian dollar held firm in local trading on Thursday as the US currency came under pressure, although conflicting pressures were again a feature. Domestically, the unemployment rate increased to 4.1% from 4.0% previously while there was a solid increase in employment of 14,800. Employment trends are a lagging indicator, however, and the forward-looking indicators are liable to be less favourable which will curb support for the currency.
Any sustained increase in risk aversion would tend to be a negative Australian dollar influence, although the initial strength of commodity prices will be supportive. A rally in equity prices helped push the Australian dollar to highs near 0.9350.