by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to sustain a recovery through the 1.4550 level against the Euro and weakened to lows around 1.4640 in US trading. Improved risk tolerances have lessened defensive demand for the US currency over the past 24 hours.
Fed Chairman Bernanke stated that growth should recover from late 2008, but that there were still downside risks to the economy. Bernanke stated that the Fed was prepared to act as needed based on medium-term projections. The stance suggests that the Fed will be reluctant to cut interest rates aggressively further in the short term, although there could be a further policy shift if there is a sharp downgrading of internal Fed forecasts.
Bernanke’s overall tone was also again relatively downbeat which will tend to undermine dollar confidence. Markets were also pricing in around an 80% chance of a further 0.50% interest rate cut at the March FOMC meeting. Elsewhere, jobless claims were little changed at 348,000 in the latest week.
The US trade deficit fell to US$58.8bn for December from US 63.1bn the previous month as exports recovered over the month and imports weakened. For 2007 as a whole, the deficit fell by around 6% to US$711.6bn and the reduction will maintain some optimism that the US will be able to narrow the deficit further during 2008.
Provisional German GDP growth fell to 0.3% for the fourth quarter of 2007 from 0.7% previously, reinforcing expectations of a sharp slowdown while there was also a sharp slowdown in French GDP.The ECB also downgraded its GDP forecasts in the latest monthly report which will maintain speculation over a shift in monetary policy, although the inflation estimates were also increased in the report. ECB member Weber also maintained a tough stance on inflation in remarks on Thursday.
The yen had a generally weaker tone in Asian trading on Thursday. Domestically, the GDP data was significantly stronger than expected with a 0.9% increase for the fourth quarter as business investment was strong and exports to Asia were robust. The data will ease immediate fears over the Japanese economy, although sentiment will remain fragile.
The combination of firmer Japanese and US growth has helped support risk appetite and this will help underpin carry trades which will dampen immediate yen demand. These pressures were magnified by a strong rise in Japanese equity prices and a drop in volatility levels to the lowest of the year.
The yen weakened to lows around 108.60 against the dollar, but regained some ground in New York as risk aversion increased again. The Japanese currency also regained some losses against the Euro.
Sterling pushed to highs around 1.9730 against the dollar during Thursday and touched the 0.74 resistance level against the Euro. The UK currency was still gaining some support from a reduction in market expectations over the scope for Bank of England interest rate cuts over the remainder of this year.
There were no major developments during Thursday and the UK currency failed to hold the best levels as profit taking emerged.
Sterling was also undermined by a renewed increase in risk aversion and persistent underlying doubts over the UK fundamentals, especially after the bank’s downbeat growth outlook in yesterday’s report.
The dollar strengthened to highs around 1.11 against the franc on Thursday and also dipped to lows near 1.62 against the Euro as equity markets strengthened.
The ZEW economic expectations index for Switzerland fell sharply to -55.5 in January from -32.7 the previous month which will reinforce expectations that the Swiss economy will slow significantly.
The franc secured some renewed support in US trading as underlying fears over the global economy returned. There were renewed fears over credit markets which boosted defensive demand for the Swiss currency and the dollar retreated to below 1.10.
The Australian dollar regained ground on Thursday after the significant dip seen over the previous 24 hours. Domestically, the labour-market data was strong with a 26,800 increase in employment for January while unemployment dipped to 4.1% from 4.3%. The data reinforced market expectations that the Reserve Bank would tighten policy again in the short term with Australian dollar gains to 0.9050.
Global market conditions were also more favourable for the Australian currency as regional equity markets rose strongly. Any further relief over global trends would provide further short-term Australian dollar support, but there are still major risks and it was struggling to sustain the gains.