by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar came under renewed selling pressure on Wednesday as markets continued to challenge record Euro levels against the US currency. The dollar weakened to lows around 1.5980 before stabilising around 1.5950.
The US housing data was weaker than expected with starts falling to an annual rate of 0.95mn in March from 1.08mn the previous month. Permits were also weak which will maintain fears over a protracted downturn in the housing sector.
Consumer prices rose 0.3% in March while core prices rose 0.2% which both met market expectations. The overall impact of the data will be to shift the market slightly towards expecting a 0.50% rate cut at the April meeting, although major uncertainty will continue. The Fed’s Beige Book reported that the economy was slowing in most regions with a weaker labour market, although three districts were slightly more optimistic over prospects.
The euro-zone consumer inflation rate rose to a revised 3.6% in March from a provisional 3.5% while the core rate was at 2.0%. The higher rate will maintain serious ECB fears over inflation and their determination to keep a tight monetary policy.
Comments from G7 officials will be watched very closely in the short term with a particular focus on Euro-zone comments. There will be pressure on the G7 authorities to back up their weekend statement with more decisive action. Failure to comment would tend to increase speculative selling pressure on the dollar, at least in the near term.
Overall market volatilities have eased over the past 24 hours and this has provided some support to carry trades, especially with stock markets rallying. This has also lessened immediate demand for the Japanese currency.
The dollar was unable to push above the 102.0 level as there was residual caution ahead of US banking results due for release over the remainder of this week. There was also evidence of increased exporter dollar selling which made it more difficult for the US currency to gain ground. In contrast, the yen weakened to near 162.30 against the Euro.
The US currency retreated to 100.80 in European trading before rallying to 101.70 as the Morgan Stanley and Coca Cola results were better than expected. Results from the banks will remain under closely scrutiny over the remainder of this week and the yen will tend to weaken if there are above-consensus results.
The UK currency pushed to highs just above 1.98 against the dollar as the US currency came under pressure, but was unable to sustain the gains. Sterling also weakened to a fresh record low near 0.81 against the Euro.
The UK unemployment claimant count fell by 1,200 in March which was slightly weaker than expected while the February data was revised to show a rise of 600, the first increase for 17 months. The weaker trend will reinforce expectations that economic conditions are deteriorating.
The headline rate of earnings growth was slightly above expectations at 3.7%, but was below the 4.0% level which will lessen the near-term impact as there should not be any significant implications for Bank of England policy.
Overall confidence in the economy will remain very fragile, but there will be scope for capital flows on valuation grounds. Any success in easing money-market tightness would also lessen pressure for lower interest rates.
The dollar was unable to hold above 1.01 against the franc in Asian trading on Wednesday and weakened sharply to lows around 0.9940. The US currency pushed back towards parity later in US trade as the franc weakened to near 1.5950 against the Euro.
An improvement in risk conditions has curbed immediate demand for the franc on defensive grounds. Markets will continue to monitor results from the US investment banks very closely in the short term and worse than expected results would trigger fresh defensive demand for the Swiss currency.
The Australian currency has secured further support from the strength of commodity prices with the CRB index continuing to strengthen during Wednesday. The Australian dollar found support close to the 0.9250 level in local trading.
The immediate domestic influences were limited, but there will be increased fears over a sharp slowdown in the economy and this will limit the positive impact of high commodity prices. Wider dollar losses helped push the Australian currency to a high around 0.94 in New York and volatility levels are likely to remain at elevated levels in the short term.