by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to make any significant headway against the Euro on Friday and weakened to test levels around the 1.47 level in New York.
The US growth indicators were significantly weaker than expected with the New York manufacturing index falling sharply to -11.7 in February from 9.0 the previous month which follows the recent pattern of particularly weak survey evidence from the manufacturing sector.
There was also a further sharp decline in the University of Michigan consumer confidence index to 69.6 in February from 78.4 the previous month which was a 15-year low for the index. The further decline in confidence, despite a sharp drop in interest rates over the past month, will reinforce fears over the US economy, especially as a reading of this level usually signals a recession. Elsewhere, there was a 0.1% increase in industrial production for January.
The weak data will maintain pressure for the Federal Reserve to sanction further cuts in interest rates which will reinforce the lack of yield support for the US currency. Dollar confidence will also tend to weaken if there is further evidence that Fed action is not having a significant beneficial impact, but this is liable to be offset by defensive US currency demand and the dollar consolidated around 1.4670.
Long-term capital flows into the US weakened to US$56.5bn in December from US$90.9bn the previous month, although the total was still close to the US trade deficit which should be broadly neutral for the US currency.
The Euro-zone trade account reverted to a EUR4.2bn deficit from a revised EUR3.0bn surplus the previous month. The deficit is at mild levels, but will reinforce expectations of a weaker Euro-zone economy which will hamper the Euro.
The yen remained on the defensive against the dollar in Asian trading on Friday, but the US currency was unable to make a fresh challenge on the 108.50 level.
Following the latest council meeting, the Bank of Japan voted unanimously to leave interest rates on hold at 0.50%. The bank’s monthly report was generally cautious over the economic outlook with a slight downgrading of expectations for industrial production. Overall market sentiment towards the Japanese economy will remain subdued.
Levels of risk aversion increased again in New York as US growth fears intensified. In this environment, the yen secured renewed support with gains to highs near the key 107.25 level against the US currency.
Sterling hit further selling pressure above 1.97 against the dollar on Friday and weakened sharply to lows near 1.96. Sterling was undermined in part by the inability to break resistance levels around 0.74 with the failure triggering stop-loss selling and this pushed Sterling to lows near 0.75 against the Euro.
There were no significant data releases, but underlying confidence in the UK fundamentals remained fragile and this offset the beneficial impact of a scaling back in interest rate cut expectations. The Bank of England February minutes will be watched very closely next Wednesday for further hints on interest rates.
Levels of risk aversion were also generally higher on Friday which curbed near-term support for the UK currency as global growth fears increased.
The Swiss currency continued to gain strongly against the dollar on Friday with a peak beyond the 1.09 level while the franc also tested levels beyond 1.60 against the Euro before correcting slightly weaker.
Levels of risk aversion were higher on Friday which revived buying interest for the Swiss franc, especially as the US growth indicators were generally disappointing. Weak stock markets also helped underpin the franc.
Investment banks are downgrading their Swiss interest rate forecasts which will curb franc demand to some extent, although the impact should be limited.
Source: VantagePoint Software, Market Technologies, LLC
The Australian dollar sustained a firm tone over the past 24 hours and continued to hold above the 0.90 level against the US currency, although gains have been limited. The Australian currency has gained further support from the existing level of yields while there are also strong expectations that the Reserve Bank will increase interest rates again in the short term.
The currency is still being restrained by underlying unease over risk aversion and global economic conditions, especially as market fears over credit conditions remain at elevated levels. The Australian currency was still generally resilient during Friday as the conflicting pressures continued.