by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
From lows just beyond 1.47 againstthe Euro,the dollar strengthened to highs around 1.4625 on Monday, but was unable to strengthen through resistance levels and drifted back to 1.4660 later in New York
The US ISM index for the manufacturing sector fell to 50.8 in November from 50.9 previously. The prices index was strong for the month, but the employment component fell back to below the 50.0 level which suggests that employment is falling. There will be some relief that the figure was not below the 50.0 expansion threshold, but there will still be persistent growth concerns.
Markets remain convinced that the Federal Reserve will cut interest ratesagain at the December 11 FOMC meeting and there has also been increased speculation that the Fed will sanction a discount rate cut ahead of the meeting ifmoney-market tensions fail to ease which sapped dollar demand.
There were downbeat forecasts of 2008 housing-sector activity from industry officials on Monday, but the negative dollar impact was offset by hopes over a deal to curb sub-prime related foreclosures. Continuing fears over the Euro-zone growth outlook also offered some dollar protection.
There was evidence of Middle East policy splits over the future of dollar pegs with the UAE proposals for greater flexibility being rejected by Saudi Arabia. Underlying stresses over the peg will continue to unsettle the dollar even if no policy changed are agreed at this meeting.
The yen pushed back to highs 110.15 against the US currency on Monday with a significant move stronger against the Euro. Although the yen was unable to push through 110.0, there are still important stresses within the money markets which should underpin the yen and volatility is liable to remain at elevated levels.
Over the weekend, ratings agency Moody’s announced that it would announce a substantial number of downgrades in the banking sector which tempered the mood of optimism in global equity markets and provided yen support. Global liquidity levels will be watched very closely in the short term as any effective seizure in markets would support the Japanese currency.
Bank of Japan Governor Fukui state that the bank would tighten policy decisively at the appropriate time, although there was no indication of a near-term move. China’s policies will remain under scrutiny with some speculation over a widening of the maximum daily permitted yuan band move.
Sterling dipped to lows around 2.0525 against the dollar on Monday before recovering ground firmly to 2.0660 in New York trade. The UK currency also hit 19-day highs around 0.71 against the Euro.
The PMI index for the manufacturing sector rose to 54.4 in November from 52.9 the previous month which will provide some near-term relief over the industrial sector.
Conditions within the services and financial sectors are still liable to dominate and there will be further concerns over potential damage from the credit squeeze, especially asLibor ratesremained at elevated levels on Monday.
If liquidity conditions do not ease, there will be further pressure for aBank of Englandrate cut this week. The shadow MPC made of academic economists voted 5-4 for a cut in interest rates.
The dollar was unable to hold above 1.13 against the franc on Monday and weakened back towards 1.1275, although the US currency was proving resilient. The franc tested levels beyond 1.65 against the Euro.
The National Bank added extra liquidity to money markets which helped push Swiss market rates down and this undermined the franc to some extent. Near-term franc moves will also continue to be strongly influenced by risk aversion levels.
The Swiss PMI index rose to 63.4 in November from 60.7 the previous month which will maintain confidence in the Swiss economy, especially given fears over Euro-zone growth trends.
The local currency dipped below 0.88 against the US dollaron Monday after the trade data before finding support. The trade deficit widened sharply to a record AUD2.98bn for October from AUD1.80bn the previous month as exports fell. The near-term currency impact should still be measured, but it is always very dangerous to ignore trade issues and international confidence in a currency can disappear suddenly.
The Australian dollar will gain support from any further recovery in global stock markets, but credit conditions will remain stressed and the currency struggled to pull significantly away from the 0.88 level.