by Darrell Jobman, Editor-in-Chief TraderPlanet.com
After initially failed to hold gains on Tuesday and weakening back to 1.3680, the dollar strengthened to 1.3610 later in US trading as a sharp Wall Street fall triggered defensive US currency demand.
US consumer confidence fell to 105.0 in August from a revised 111.9 the previous month as the employment market was less robust and this was the lowest figure since September. Underlying fears over the housing sector will continue with prices recording a 3.2% annual decline in the year to June according to the latest Standard & Poor’s survey.
Minutes from the August 7th meeting confirmed that the FOMC was more concerned over the growth outlook and credit risks. The Fed also stated that action may be required if the financial-market rout continued. The impact should be limited as futures markets have already priced in interest rate cuts of at least 0.75% by the end of 2007. Underlying credit stresses will maintain some safe-haven dollar buying.
On Monday, ECB President Trichet stated that his August comments over the need for strong vigilance over inflation preceded market volatility. The remarks will continue to dampen expectations over a September interest rate increase, especially as ECB officials generally appear to be taking a slightly softer stance.
Speculation over a reduced commitment towards a rate hike will curb Euro sentiment in the short term. The German IFO index weakened to 105.8 in August from 106.4, although the decline was less than expected which will ease fears over a sharp economic deterioration.
The Japanese yen found support close to 115.80 on Tuesday and strengthened to test level below the 114.50 level in US trading while the Japanese currency also tested levels beyond 157.0 against the Euro. Yen moves have remained correlated strongly with global stock price movements and Wall Street weakness helped strengthen the Japanese currency.
There have been significant cabinet changes within the government. New Cabinet Secretary Yosano has previously had a strong relationship with Bank of Japan officials which will make it easier for the central bank to push ahead with an interest rate increase. In contrast, the appointment of Nukaga as Finance Minister will tend to increase government opposition to a strong yen and could create significant internal friction if the currency strengthens sharply.
Sterling was unable to sustain a recovery back above 2.01 against the dollar on Tuesday and weakened back to below 2.0050 in US trading while finding support weaker than 0.68 against the Euro. The UK currency will continue to be influenced strongly by risk aversion levels and a renewed drop in stock market prices pushed Sterling weaker.
The latest BBA data recorded a decline in mortgage approvals to 67,000 in July from 75,300 in June which will reinforce expectations of a gradual slowdown in the housing sector, although there was only a small annual decline.
There will also be fears over a more serious slowdown given the combination of tighter lending standards and an over-stretched consumer sector. The housing-related data will continue to be monitored closely and weak survey evidence would undermine Sterling.
The Swiss currency again found support weaker than 1.64 against the Euro on Tuesday and strengthened back to 1.6350 while the franc continued to probe resistance levels below the 1.20 level against the dollar. Currency moves will continue to be correlated strongly with stock market moves and Wall Street losses helped trigger franc gains in US trading.
The UBS consumption indicator edged weaker to 2.26 in July from 2.31, although this was still at an historically high level and still suggests robust consumer spending growth. The KOF index will be watched closely on Wednesday and any figure near or above the July level of 2.13 would maintain confidence in the economy.
The Australian dollar strengthened to highs above the 0.83 level against the US dollar on Monday before weakening in choppy trading on Tuesday. The Reserve Bank of Australia stated that credit conditions were improving, but markets are still very cautious with risk tolerances tending to decline and Wall Street losses pushed the currency below the 0.82 level in US trading.
Although the domestic influences have remained limited, the retail sales data will be watched closely at the end of this week for evidence on domestic demand and a robust figure would underpin confidence.