by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to hold stronger than the 1.58 level against the Euro in Asian trading on Monday and weakened steadily to lows near 1.5950.
The US currency was again being hampered by the strength of oil prices which temporarily traded at fresh record highs before edging lower in US trading. The Bank of America quarterly results were weaker than expected and this also dampened the mood of cautious optimism that had built up over the second half of last week. There is, however, still scope for some improvement in net inflows which should underpin Sterling to some extent.
After no significant US data releases on Monday, the existing home sales data will be watched closely on Tuesday for further evidence on market conditions. The inventories and prices data will be watched closely as a reduction in excess stock will be a key requirement for a base to form.
The ECB comments on Monday were relatively restrained, but members continued to take a firm stance on inflation. The comments from bank and Euro-zone government officials will be monitored very closely n the short term. There will be increased speculation of tensions between the two sides with the ECB concentrating on inflation while the individual governments will be more concerned over weakening growth conditions and the strong currency. Any public stresses would unsettle the Euro.
Yen trends will still tend to be dominated by levels of risk aversion in the short term and the dollar consolidated below the 104.0 level on Monday as it corrected over-bought conditions after the rapid gains on Friday. Firm Asian stock markets provided some underlying support to the US currency and initially limited any yen recovery.
Domestically, the tertiary index of services-sector growth fell sharply by 1.7% in February, although there was still an annual increase. There was speculation that the Bank of Japan will drop any reference to higher interest rates at its April 30 six-monthly report and this was a small negative yen factor.
The US dollar dipped to lows just below 103.0 in early New York before rallying to 103.30 with buying support on dips.
Sterling briefly pushed above the 2.00 level against the dollar on Monday, but was unable to sustain the gains and weakened sharply back towards the 1.98 level in US trading. The UK currency also weakened to lows around 0.8040 against the Euro.
The Bank of England confirmed on Monday that it will initially accept GBP50bn in mortgage-related securities in exchange for government bonds. If money-market stresses abate, this would ease pressure on the central bank to sanction a further aggressive near-term cut in interest rates. This would help underpin the UK currency, especially as financial-sector confidence would tend to stabilise.
The overall market reaction to the announcement was one of disappointment, primarily reflecting the fact that the potential favourable impact had been discounted at the end of last week.
There was also a further underlying lack of confidence in the housing sector with Rightmove recording a decline in the annual house-price index to 1.3% in March from 5.0% previously. Housing fears will limit the scope for Sterling recoveries.
The dollar was unable to hold above the 1.02 level against the franc on Monday and dipped sharply to lows near 1.0060 before rallying. The Swiss currency edged stronger against the Euro.
The franc also drew some support from the need to correct over-sold conditions after sharp losses on Friday while European equity markets were also generally on the defensive.
Domestically, producer prices rose 0.6% in March with an annual increase of 3.9% as energy prices continued to rise. The data will reinforce National Bank unease over inflation conditions and will tend to reinforce a reluctance to cut interest rates in the short term.
The Australian dollar retained a firm tone in local trading on Monday with the currency probing resistance levels above 0.94 against the dollar in early Europe. There was a 1.9% increase in producer prices for the first quarter which increased speculation that there could be a strong reading for consumer prices on Wednesday. A high reading would keep the Reserve Bank on inflation alert.
The Australian currency is also drawing support from the high level of commodity prices. While metals prices remain high, the currency will tend to remain firm, but there are still important risks to the domestic economy. Although commodity prices came off highs later in US trading, the Australian dollar held above the 0.84 level.