by Darrell Jobman, Editor-in-Chief TraderPlanet.com
At the G7 meetings late on Friday, officials announced a changed stance on currencies. The statement referred to the fact that members were concerned by recent exchange rate movements as they had potentially negative implications for economic and financial stability. The dollar was not mentioned specifically, but this was the clear target for the statement. In response, the dollar strengthened to highs near 1.5680 in early Asian trading on Monday as long Euro positions were scaled back.
The evidence suggests that the Euro-zone officials were particularly keen on the change in rhetoric which was the first significant change in tone since 2004. There were, however, also reports that protracted negotiations were required to agree the statement with the US and UK representatives reluctant to sanction the change.
The key factor now, therefore, will be to assess how serious G7 are and whether there will be any action to back up the more aggressive verbal stance if the dollar continues to weaken. If markets suspect that further action will not be forthcoming, then dollar selling is liable to persist. In this context, the dollar weakened to lows around 1.5880 in early US trading on Monday. French Finance Minister Lagarde stated that is was as important as the 1987 Plaza accord which helped the dollar back to near 1.58.
There was a small 0.2% increase in US retail sales for March while the February decline was revised to -0.4% from -0.6%. The data will ease immediate fears over a slump in sales, but underlying confidence will remain weak, especially with confidence at a depressed level. High gasoline sales helped boost the headline figure and data will remain under close scrutiny this week.
The G7 policy shift on currencies triggered a dollar move back above the 101.0 level in early Asian trading on Monday as the US currency rallied generally.
The yen, however, secured net gains in Asian trading on Monday, primarily due to a renewed increase in risk aversion. The G7 comments on stabilising the credit crunch failed to have a significant impact and the yen was boosted by a sharp drop in Asian stock markets as the Nikkei index fell by over 3.0%.
The Bank of Japan minutes from March again concentrated on the downside risks to the economy which curbed yen support to some extent. A weak earnings report from Wachovia Bank pushed the dollar back to 100.30 in early New York before a renewed move to 101.0.
The UK currency strengthened against the Euro following the G7 statement on currencies with highs near 0.7960 and was able to hold stronger than 0.80 even though the Euro rallied against the dollar. In response, the UK currency strengthened to highs near 1.9890 against the US currency before weakening back to 1.9755 in New York.
UK producer input prices rose a further 1.8% in March to give a 20.6% year-on-year rise. Output prices were also higher than expected with the 6.2% annual increase the highest since 1991. The consumer prices data will be watched closely on Tuesday for further evidence on inflation and a high figure would provide some initial Sterling support.
There will be additional pressure on the government to alleviate the stresses within the mortgage and credit markets and any proposals for direct action would alleviate pressures on the Bank of England to cut interest rates aggressively.
The US dollar was unable to sustain gains above parity against the franc on Monday and weakened to lows near 0.9920 in early US trading. The Swiss currency also edged stronger to 1.5775 against the Euro before weakening back to 1.5820 in New York.
Global equity markets were generally on the defensive during Monday with most bourses suffering losses. This vulnerability helped sustain demand for the Swiss currency during the day.
Source: VantagePoint Software, Market Technologies, LLC
The Australian dollar dipped back to test levels below 0.9300 as risk aversion increased late on Friday. The weaker trend was sustained in local trading on Monday with losses to a low near 0.92 before a tentative rally. The currency was undermined initially by a generally stronger US dollar trend.
Overall risk aversion remained higher as Asian stock markets weakened. The US currency also retained a firmer tone while domestic unease increased. There was a sharp drop in housing finance data which will reinforce fears over a sharp slowdown in the economy. The domestic fears will tend to remain a negative influence on the Australian currency in the short term.