by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened to highs near 1.5550 against the Euro in European trading on Friday before being subjected to a corrective reversal following strong gains over the previous 24-hour period.
The revised University of Michigan consumer confidence index edged lower to 62.5 for April from a provisional 63.2 which will maintain fears over the outlook for consumer spending, although the short-term impact should be measured. An important element in the survey was an increase in the inflation expectations component to 4.8% from 4.3% the previous month. This is particularly significant as the Federal Reserve will need to monitor trends closely. The rise in inflation expectations will certainly intensify opposition from some Fed members to further monetary stimulus.
There has been further speculation that the Fed will suspend interest rate cuts after sanctioning a further 0.25% cut at the April 30 meeting. Next Wednesday’s FOMC meeting will be an increasingly important focus at the beginning of next week, especially with no fresh data on Monday.
Euro-zone money supply growth slowed to an annual rate of 10.3% in March from 11.3% the previous month and this reinforced expectations of a slowdown in the economy. More moderate money supply growth will increase speculation that the ECB will move away from a restrictive policy over the next few months. The net shift in rate expectations will continue to provide some short-term support to the dollar.
The dollar consolidated above 104.0 against the Japanese currency in Asian trading on Friday.
Underlying Japanese consumer prices rose 1.2% in the year to March after a 1.0% increase the previous month and this was a 10-year high for the index as energy prices continued to rise sharply. There still looks to be little prospect of a near-term increase in interest rates by the Bank of Japan which lessened the data’s impact.
The dollar was unable to make a serious challenge on the 105.0 level on Friday and there was an important element of consolidation over the day ahead of the Golden Week market holidays next week.
Overall risk tolerances were still higher and volatility levels have fallen sharply which should boost confidence in carry trades and lessen short-term yen support. The dollar was close to 104.50 in New York trade.
Sterling found support below the 1.97 level against the dollar on Friday and rallied to highs near 1.99 in European trading. The UK currency also strengthened to a three-week high against the Euro close to 0.7850 before drifting weaker. Credit-related fears remained slightly lower which helped underpin Sterling while it also looked to correct from heavy losses over the past few weeks.
UK GDP rose 0.4% in the first quarter of 2008 which was the slowest growth rate for three years as the financial sector weakened significantly. There was also a drop in services-sector growth to 0.3% in the three months to February from 0.4% previously. The data will reinforce expectations of a sharp slowdown in growth, although there will be some relief that an even sharper deterioration was avoided.
The latest survey recorded a further increase in inflation expectations and this will reinforce expectations that the Bank of England will look to resist a further near-term cut in interest rates.
The Swiss franc found support close to 1.6250 against the Euro and 1.0430 against the dollar. There was a strong case for a franc correction following heavy losses over the previous two days.
The Swiss currency also secured a temporary boost from reports that a US ship had fired upon an Iranian vessel.
Overall risk tolerances were still higher and this continued to curb underlying franc demand in the global markets. Wall Street opened weaker on Friday, but subsequently rallied and this helped pull the franc lower to 1.0370 against the dollar from a high near 1.03.
The Australian dollar was unable to regain momentum in local trading on Friday. The domestic influences were limited with yield support still providing support for the currency despite some doubts over underlying economic trends.
The currency was still being driven by underlying US dollar trends and commodity prices. In this context, losses extended to 0.93 in early Europe as commodity prices continued to weaken. The Australian dollar will gain some support from a drop in risk aversion as interest in carry trades will tend to increase.