by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to strengthen through the 1.4630 region against the Euro on Tuesday with resistance levels strengthened by reports that Eastern European central banks were buying Euros. After a retreat to 1.47, a break of support pushing the dollar to lows around 1.4765 and there was no significant recovery in New York.
The currency failed to gain support from a commitment to maintain the dollar pegs at the GCC meeting in Doha.
There were no significant US data releases with overall confidence in the US economy remaining weak due to persistent fears over growth trends. The ISM index for the services sector will be watched closely on Wednesday and a significant downturn in the index would reinforce fears that financial-sector weakness will undermine the wider economy. In this environment, markets will continue to expect an interest raecut next week and any destabilising fall on Wall Street would trigger expectations of an interim discount rate cut.
Euro-zone producer prices rose 0.6% in October with a year-on-year increase of 3.0% which will maintain fears over inflation within the ECB. There will, however, still be unease over growth trends with speculation that the credit tightening will undermine growth. The contradictory pressures should ensure that interest rates are left on hold this week. There will also be further protests against Euro strength from Euro-zone officials with German government ministers appearing to show increasing unease over the situation.
The yen edged stronger in Asian trading on Tuesday as risk aversion levels increased slightly with a reluctance to extend carry-trade positions given uncertainty over US and global growth trends. The Japanese currency also gained some support as Asian stock markets drifted lower with sentiment remaining cautious.
The yen challenged levels close to 110.0 against the dollar with some additional backing due to speculation that China would widen the daily permitted trading band.
The yen pushed to highs near 109.50 as risk aversion increased before weakening back towards 110.0 as Wall Street attempted to rally. Volatility levels will remain high in the short term as underlying risk aversion is likely to persist.
Sterling pushed stronger against the Euro in early Europe on Wednesday, but then fell rapidly with losses back towards 0.7175. The UK currency also drifted weaker to 2.0580 against the dollar despite US currency vulnerability. The Bank of Canada decision to cut interest rates increased speculation over a UK move this week.
Conditions within the services and financial sectors are still liable to dominate market sentiment and policy. In this context, there will be further concerns over potential damage from the credit squeeze, especially as Libor rates remained at elevated levels on Tuesday with 1-month Sterling rates now 1.0% above base rate.
The latest BRC retail sales report recorded that growth remained subdued with a 1.2% like-for-like sales increase in the year to November with sales growth being driven by discounting. If liquidity conditions do not ease, there will be increasing pressure for a Bank of England rate cut.
The CIPS index for the services sector will also be important on Wednesday for evidence on the credit-crunch impact. The data will be particularly important as the central bank has stated that survey evidence will be a key factor in determining policy decisions.
The franc found support close to 1.13 against the dollar on Tuesday and strengthened to highs around 1.1170 as the US currency came under selling pressure. The Swiss currency also strengthened back beyond 1.65 against the Euro.
The franc gained support from a general increase in risk aversion as credit fears persisted while the increased concerns over the Euro-zone economy also boosted the currency with the Swiss economy seen as a safe haven.
The Australian dollar weakened in local trading on Tuesday with a drop to test support levels below 0.8750 against the US dollar. The domestic data was weaker than expected with the retail sales increase held to 0.2% in November after a revised 0.7% increase the previous month while building approvals also fell.
The Australian currency was also hampered by caution over carry trades which undermined the Australian dollar with a dip in flows from Japan. Underlying stresses are liable to persist in the short term and this will tend to keep the Australian currency on the defensive with the currency unable to regain losses.