by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to 1.3840 in early Europe on Monday, close to the July record low at 1.3850, before edging stronger in US trade. The dollar’s trade-weighted index also fell to a 15-year low below the 80.0 level before recovering slightly. A tentative recovery on Wall Street eased immediate market speculation over an emergency Fed cut in interest rates and this helped stabilise the dollar although sentiment remained fragile.
There will be further caution over ahead of the Federal Reserve interest rate decision on Tuesday. There is unlikely to be a change in interest rates, but the statement will be watched very closely and this meeting is certainly the most important of the year so far.
The dollar will tend to some under renewed selling pressure if the Fed expresses increased concerns over the growth outlook and credit-related difficulties. The impact should be limited to some extent by the fact that markets have already priced in at least one interest rate cut this year. Any evidence of complacency over the situation by the central bank would also tend to undermine Fed credibility.
The trend of yen gains accelerated in early Asian trading on Monday due to fears of a rout in global equities. The Japanese currency strengthened to a high of 117.20 against the dollar before edging back to 117.60 in a fragile correction as the worst fears over global stock markets were not realised.
Risk aversion eased further in US trade and this allowed a more substantive dollar recovery back to near 119.0 in volatile trading.
There will still be the threat of position capitulation due to margin calls and markets will continue to be more cautious over carry trades. Volatility levels will remain higher in the short term and Japanese finance officials will be looking to stabilise market conditions if the dollar crumbles again. There is also likely to be further retail and fund yen selling interest below the 118.0 level which will curb near-term currency support.
Sterling was unable to sustain a move above 2.0450 against the dollar in early Europe on Monday and dipped sharply to lows below 2.03. The UK currency also weakened to a two-month low against the Euro with stop-loss selling on a break of 0.6770 pushing the currency to a low of 0.6810.
There has been a gradual erosion of interest rate expectations with reduced confidence that rates will increase to above the 6.0% level and this is undermining Sterling support. In this context, the Wednesday Bank of England inflation report will be very important for interest rate expectations and the currency with the currency very vulnerable if the report hints that rates have peaked.
The latest UK data will not have a big impact with industrial production rising 0.1% in June to give a 0.8% annual increase, although it will offer some reassurance.
UK currency moves are also likely to remain correlated with global stock market moves. The impact of any selling pressure will be enhanced by the fact that sustained weakness in equity and credit markets would weaken UK growth given the big contribution made by the financial sector over the past two years.
There is no significant economic data over the next 24 hours with franc moves likely to remain dominated by levels of risk aversion and movements in global stock prices. An upbeat assessment by the Federal Reserve would be likely to weaken near-term Swiss currency support.
Contradictory pressures on the Australian dollar will continue in the short term. The currency will continue to be unsettled by an underlying reduction in carry trades, but these pressures will be offset by market expectations that the Reserve Bank will increase interest rates this week.
The stabilisation in equity markets helped the Australian currency push to 0.8580 later in US trade.