by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to strengthen through the 1.3450 level against the Euro and weakened to lows near 1.3550 in US trading with the Euro gaining some traction from gains against the yen. A gradual easing of risk aversion also undermined defensive demand for the dollar as US Treasuries weakened.
There were no data releases during the day and the US currency was again undermined by expectations of lower interest rates to support the economy. Fed officials have looked to curb expectations of a near-term cut in rates and credit conditions have improved slightly, but markets will continue to price in a rate cut which will tend to undermine the dollar.
The ECB aimed to talk up the Euro-zone economic prospects in comments on Wednesday and repeated that inflation is still the pre-dominant concern. The central bank will not want to have its options limited ahead of the September council meeting and they may still decide against a hike, but there will be renewed speculation over an increase which will underpin the Euro.
The Euro-zone current account returned to a EUR5.9bn surplus for June which will help ease immediate fears over the competitive position, although the impact should be limited. The 4.4% increase in industrial orders for July will help maintain confidence in the Euro-zone economy.
The dollar found support around 114.20 against the yen during Wednesday and challenged levels above the 115.0 level as the yen was undermined by improved risk tolerances. Global stock markets remained firm and, although underlying credit stresses persisted, there was no further deterioration in conditions which encouraged a move back into high-yield currencies.
The yen will strengthen sharply if Japanese interest rates are increased on Thursday, although an unchanged policy looks more likely with the Bank of Japan waiting until markets are more stable before considering a further tightening. Bank Governor Fukui’s comments will also be watched closely on Thursday for policy hints.
The Japanese trade surplus weakened by over 20% to JPY671bn in the year to July as export growth slowed. The immediate impact will be limited, but the Finance Ministry will be wary of further strong yen gains given the potential impact on exports.
Sterling found support around 1.98 against the dollar on Wednesday and strengthened to test levels above the 1.99 level in US trading while the UK currency was little changed against the Euro. There were tentative gains for high-yield currencies as global stock and credit markets stabilised and this confidence helped provide near-term Sterling support.
The latest CBI industrial survey reported an increase in the orders component to 9 from -6 the previous month. The output and export components rose less strongly, but the data will help maintain near-term confidence in the industrial sector.
The UK housing-market trends and Bank of England comments will continue to be monitored closely in the short term. The central bank has, so far, been noticeable for its lack of comment on market stresses and any hints that interest rates will need to rise again this year would tend to support the UK currency. The more likely outcome for now is that the bank will keep a low public profile.
The Swiss currency drifted weaker against the Euro on Wednesday as safe-haven demand for the currency weakened. The franc, however, found support close to 1.2110 against the dollar and strengthened back to 1.2060 as the US currency stumbled.
The KOF economic institute took a generally optimistic stance towards the economy in comments on Wednesday. National Bank member Hildebrand stated that the economy would be affected by market turbulence and that the bank would take appropriate action if necessary. At this stage, however, the National Bank will certainly not rule out an interest rate increase at the September policy meeting which should curb franc selling.
The Australian dollar edged firmer in local trading on Wednesday as markets were slightly more confident over high-yield currencies with credit markets showing some signs of greater stability. The latest leading indicators data was firm, but global financial-market conditions will remain the dominant market influence.
Any sustained improvement in risk conditions would support the Australian dollar, but confidence will remain fragile and any revelations of further fund losses would result in a rapid unwinding of carry trades. The Australian currency consolidated above the 0.80 level with gains to 0.8065 later in US trading as Wall Street strengthened.