by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to make any headway through 1.5680 against the Euro on Wednesday and weakened sharply to lows beyond 1.5865 before stabilising in US trade.
There were no major US developments over the day with the US currency unsettled by a lack of confidence in the economy as the IMF forecast a mild recession. The dip on Wall Street and high oil prices also undermined confidence in the US dollar.
The ECB will announce its latest interest rate decision on Thursday and the most likely outcome is that rates will be left on hold at 4.0%. If so, then the statement from ECB President Trichet will be very important for Euro sentiment. Markets will be monitoring official comments both on interest rates and the currency. The ECB is still seriously concerned over inflation threats within the Euro-zone and the bank is likely to maintain a tough approach, although Trichet is also likely to issue warnings over growth trends which will curb Euro support.
The ECB President is likely to voice further opposition to excessive currency moves and the Euro will be vulnerable to more substantial selling pressure if there is more aggressive rhetoric against Euro strength, especially with G7 meetings starting on Friday.
The dollar was unable to make a further challenge on 102.80 in Asian trading on Wednesday. The Bank of Japan left interest rates on hold at 0.50% by a unanimous vote at the latest council meeting. The Bank of Japan’s assessment of economic conditions was downgraded and new Governor Shirakawa took a generally downbeat stance on prospects.
The yen will also continue to be influenced strongly by levels of risk aversion and a net underlying easing of global fears will tend to weaken demand for the Japanese currency. Confidence is still very fragile, illustrated by a decline in the Nikkei index on Wednesday. A generally weak dollar and a retreat on Wall Street pushed the US currency to lows around 101.50 in US trade.
The Nationwide consumer confidence index dropped to a fresh four-year low while there was evidence of moderating wage settlements. Evidence of deterioration in the housing and consumer sectors will reinforce fears over the UK economy with Sterling weakening to record lows near 0.80 against the Euro and dipping to below 1.97 against the dollar.
Industrial output rose 0.3% in February, but this did not have a significant impact and the UK currency secured only slight relief. As the Euro strengthened generally, the Sterling weakened to fresh record lows beyond 0.80 in New York.
The Bank of England will be the main focus on Thursday and there is a strong probability that rates will be reduced. The most likely outcome is that rates will be cut by 0.25% to 5.0% which could trigger at least a limited rebound in the currency, although there is a small chance of 0.50% which would result in more aggressive Sterling selling, at least in an initial response.
The Swiss currency found further support close to 1.5950 against the Euro on Wednesday before strengthening to 1.5850 in New York. The franc also strengthened sharply against the dollar with a test of levels beyond parity before settling close to 1.0015.
The general decline in global stock markets provide some support to the franc with a lack of confidence in the world economy.
Overall credit fears are still at a lower level which should curb aggressive demand for the Swiss currency with choppy trading conditions liable to persist.
The Australian dollar has retained a firm stance over the past 24 hours, although conflicting pressures have tended to intensify. The domestic trends remained generally negative with the Westpac index of consumer confidence weakening to the lowest level since 1993. The decline will reinforce expectations of a sharp slowdown and speculation that interest rates could be cut later this year.
In contrast, commodity prices have remained firm while there has been increased speculation over investment inflows to take advantage of the high prices. Although commodity prices will provide initial support, the domestic risks are liable to represent an increasing threat to the currency.