by Darell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to 1.3680 on Thursday and strengthened to highs beyond 1.36, but was unable to sustain the gains in choppy tradingand settled close to 1.3630 as ranges narrowed slightly. There are still serious stresses inmoney marketswith inter-bank rates at a one-week high and the tensions will maintain some underlying dollar demand.
US second-quarter GDP was revised up to 4.0% from the original 3.4% estimate due to a positive contribution from trade, but markets remained focussed firmly on future trends. Elsewhere, there was a rise in jobless claims to 334,000 in the latest reporting week from 325,000 previously and the increase will maintain speculation that layoffs are increasing.
Comments from Fed Chairman Bernanke on interest rates and financial risks will be watched very closely on Friday. There is still pressure for an interest rate cut, but markets are now slightly less confident that the Fed will lowerborrowing costs and the US dollar would be likely to strengthen if Bernanke takes a firm approach.
German unemployment continued to fall for August, although the 15,000 drop was lower than expected which will maintain some expectations over an underlying slowdown in the economy. There will also be further concerns that credit-related losses will maintain stresses for the Euro-zone banks and any further forced bail-outs would undermine the Euro. Markets will remain on alert for comments from ECB officials ahead of next week’s council meeting.
Source: VantagePoint Software, Market Technologies, LLC
The yen has found support beyond the 116.20 level over the past 24 hours and strengthened back towards 115.0, but was unable to sustain the advance and settled close to 115.85 in more cautious trading.
The yen was also supported in Asian trading on Thursday as the Australian-based Basis Yield Alphafiled for bankruptcywhich maintained fears that credit-related stresses would continue and maintain pressure for an unwinding of carry trades.
The latest Japanese capital account data recorded net flows into Japan, although there was no evidence of large-scale capital repatriation and this will limit scope for near-term yen gains.
There is likely to be further Japanese buying of overseas currencies asinvestment trusts look to allocate new funds and this will be an important factor in curbing any yen advance. Volatility levels are liable to remain high with low liquidity on Friday ahead of the US holiday on Monday.
Sterling weakened to lows around 2.0050 against the dollar in early Europe on Thursday before a rebound to 2.0150 in choppy trading. The UK currency was undermined initially by the fact that the Bank of England’s emergency discount window was tapped on Wednesday. The use of this facility increased speculation that a major UK bank was in financial difficulties and weakened the currency.
The latest Nationwide Bank survey reported a firm 0.6% increase in house prices for August, although there was a drop in unadjusted prices. Underlying lending growth was firm while mortgage approvalsheld steady. The CBI retail survey was slightly weaker over the month which maintained expectations of an underlying slowdown in spending.
The data overall will still dampen immediate fears over a sharp slowdown in the economy, although underlying fears over the housing sector will persist.
The Swiss currency fluctuated around the 1.64 level against the Euro during Thursday. The franc weakened slightly against the dollar, but resisted heavy losses.
Levels of risk aversion will continue to be watched closely and underlying credit stresses should still offer important underlying support to the Swiss currency. There was uncertain trading with fears that there will be further credit stresses.
The Swiss inflation data will be watched closely on Friday and an increase in theannual rateto 1.0% or higher would increase pressure for a further interest rate increase at the September National Bank policy meeting.
TheAustralian dollarwas unable to hold the gains above 0.82 in local trading on Thursday as risk conditions dominated. There was a fresh surge in risk aversion as Australian-based Basis Yield Alpha filed for bankruptcy and this triggered a renewed scaling back in carry trades.
There was a strong report for second quarter investment while the current account deficit widened slightly to AUD16bn for the quarter from AUD15.6bn. The current account will become more of an issue if risk tolerances remain lower and underlying capital flows weaken, although the near-term impact should be limited. The Australian dollar settled close to 0.8155 against the US currency.