by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar has remained generally strong during the past 24 hours and strengthened to highs near 1.3360 against the Euro before drifting weaker and fluctuating around the 1.34 level.
Risk conditions continued to dominate during Thursday and the US currency gained further support from a switch into US Treasury bonds. There was also a sharp increase in emerging-market tensions which added to the defensive dollar demand before a late rally on Wall Street eased market tensions.
The US construction data remained weak with housing starts falling by over 6% in July to an annual rate of 1.38mn while permits were also below the 1.40mn to give an annual decline of over 20%.
The Philadelphia Fed manufacturing survey was also weaker than expected with a decline to 0.0 in August from 9.2 the previous month, although the underlying components were firmer than suggested by the headline figure. There will still be fears that the US economy will slide towards recession as consumer spending falters.
The economic data will reinforce a lack of confidence in the US economy and will maintain expectations of a Federal Reserve cut in interest rates. Futures markets have now moved to price in a cut in interest rates of 100 basis points by the end of 2007. In this environment, the dollar will not be in a position to gain strong independent support.
Another increase in risk aversion strengthening the yen to beyond 116.00 in Asian trading on Thursday with very sharp appreciation against the Australian and New Zealand dollars.
Retreats quickly led to strong buying demand and the yen strengthened very rapidly to highs beyond the 112.50 level in US trading as global stock markets continued to fall. There has been a major capitulation on carry trades over the past 24 hours which strengthened the yen before a dollar rally to 114.0 later in US trading.
The latest capital account data recorded a net inflow of capital into Japan, although there was no evidence of significant capital repatriation. There will a continuing threat of disorderly carry-trade unwinding which would maintain upward pressure on the yen, especially with Uridashi bond redemptions.
There will be increased pressure for the Finance Ministry to stabilise market conditions through intervention following reports that the bank was checking prices on Thursday.
Sterling weakened to lows around 1.9770 against the US currency in Europe before staging a fragile recovery as Wall Street rallied. The UK currency held firm against the Euro.
The headline UK retail sales data was stronger than expected with a 0.7% monthly increase with an annual growth rate of 4.4% which will support optimism over spending to some extent. Caution is, however, required over the July data as there were substantial distortions and increased sales volumes was achieved at the expense of lower prices.
UK confidence overall is liable to be increasingly fragile with fears that financial-sector weakness will damage wider growth prospects and trigger a clear downward trend in the housing market. Expectations of a further interest rate increase will also continue to fade and there has been some speculation that the central bank will actually cut rates by year end.
The Swiss currency moves on Thursday were again dominated by safe-haven demand and credit conditions. The franc secured support weaker than the 1.22 level against the dollar and also strengthened to highs near 1.6250 against the Euro before a partial retreat.
The slide in global stock markets and an intensification of credit risk increased demand for the Swiss currency on defensive grounds as carry trades were reduced sharply. Short-term volatility will remain high as stock markets fluctuate widely.
Emerging-market European currencies came under heavy selling pressure and this will increase the risk of a forced repayment of Swiss-franc denominated loans.
Australian dollar losses extended to below 0.80 in Europe on Thursday. Credit fears have intensified and this has triggered a further reduction in carry trades with a repatriation of funds back to Japan. As Australian funds struggled to roll-over loans, the currency weakened to lows below 0.7850 in US trading before a recovery.
Market conditions will remain volatile in the short term and there will be speculation that the Australian Reserve Bank is less likely to increase interest rates given the underlying market stresses. There were, however, reports that the central bank was intervening to support the currency which helped stabilise conditions.