by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened to highs around 1.3560 against the Euro in early Europe on Wednesday as risk aversion remained high, but was unable to hold the gains and weakened back to lows around 1.3670 in US trading.
Dollar trends are still being influenced strongly by levels of risk aversion and equity-market trends. The US currency is gaining support when stock markets weaken and is vulnerable to selling pressure when markets stabilise. The currency is still tending to show a net weakening bias against theEuropean currencyas fears over a sharp slowdown in the US economy undermine confidence.
The second successive sharp weekly decline in mortgage applications will reinforce expectations that the housing sector will continue to weaken and damage the wider economy.
In a letter to Senator Schumer, Fed Chairman Bernanke repeated that the Fed is ready to act as needed and this will maintain expectations of a near-term cut in interest rates. Dollar selling should still be contained by the fact that markets have priced in a 0.75% reduction in the Fed funds rate by the end of 2007.
There was a dip in German consumer confidence for July and there will be a more important negative impact on Euro confidence if there is a reported increase in July German unemployment. The data is due for release on Thursday and a further unemployment fall is more likely.
Creditconcerns continued to dominate in Asian trading on Wednesday as regional stock markets fell sharply and the yen briefly strengthened through the 114.0 level against the dollar.
Asian markets were unsettled by reports that exposure to CDO securities were larger than expected at the Singapore-based DBS bank. As well as reported credit concerns, there have also been increased fears that further bank exposures to credit-related losses will be revealed over the next few days and uncertainty is undermining investor confidence.
Any dollar losses to below the 112.0 level would risk verbal intervention by the Japanese Finance Ministry. There is also likely to be further institutional dollar buying below the 114.0 level which will provide important US currency protection, especially with Japanese funds looking toinvest overseas before the end of August.
Market tensions eased in US trading with the yen weakening to lows around 115.50 against the dollar and 158.0 against the Euro.
Sterling again found support below the 2.00 level against the dollar on Wednesday and strengthened to a high of 2.0170 in US trade. Sterling also gained ground against the Euro to around 0.6775.
The UK currency is still being influenced strongly by global risk conditions and drew support from a significant rally in international stock markets during Thursday. In this context, market volatility levels are likely to remain high in the short term.
There are significant UK consumer and housing-related data releases on Thursday and these will be watched closely to assess underlying economic conditions. Any evidence of a sharp slowdown would continue to ease pressure for a further increase in interest rates and undermine Sterling confidence.
The Swiss currency strengthened to highs around 1.6315 against the Euro on Wednesday before retreating to 1.6390 as risk aversion eased. The franc again fluctuated around the 1.20 level against the dollar as cross-trading dominated.
The Swiss KOF index weakened to 2.06 in August from a downwardly-revised 2.09 the previous month. The index is still strong in historic terms and continues to suggest that the Swiss economy is resilient which will support the franc. The firm data will also encourage the National Bank to increase interest rates again at the September council meeting, although the decision is likely to be close.
Swiss currency moves will still tend to be dominated by the shifts in risk aversion and global stock market moves with the franc weakening if global stock prices continue to recover.
Australian dollar losses extended to lows below 0.81 in local trading on Wednesday before a tentative recovery. Global risk conditions dominated with stock market losses and rising risk aversion undermining the currency. The effect was compounded by increased fears that the global economy will slow and undermine commodity prices.
The domestic data on second-quarter construction was also weaker than expected which undermined the currency, although the impact was limited. Global risk conditions continued to dominate and the Australian dollar pushed back to highs around 0.82 against the US dollar as Wall Street rallied.