by Darrell Jobman, Editor-in-Chief TraderPlanet.com
After securing a modest advance on Monday, the dollar was firmly on the defensive during Tuesday. The US currency weakened to lows just beyond 1.4750 against the Euro and was unable to secure a significant recovery with consolidation around 1.4730 in New York.
Confidence in the US economy remains weak which is discouraging near-term dollar support. Fed Governor Stern stated on Tuesday that the US economy was facing a potential credit crunch similar to that seen during the early 1990s. The comments reinforced expectations of lower interest rates, although Stern also pointed to some positive aspects and warned against excess pessimism.
The NAHB housing index edged higher to 20 in February from 19 the previous month. The US economic data will be watched closely on Wednesday with important consumer prices and housing-sector releases. A combination of higher inflation and a further slide in housing starts would reinforce pessimism over the economy and the high risk of stagflation.
There were concerns over the European financial sector with reports of fresh debt write-downs related to a misreporting of trading positions and false valuations. Unease over the European banking sector is liable to curb strong buying support for the Euro.
Credit-related fears also remain an important market influence and the negative US impact will be offset by increased risk aversion. The net risks are likely to be slightly positive for the dollar given the international impact.
Regional equity markets were reasonably firm during Tuesday, but the yen was able to resist heavy selling pressure. This suggests that underlying demand may have strengthened slightly, with a lack of confidence in US and European economic trends sparking additional demand.
The Japanese currency also secured some support from speculation that the Chinese authorities would increase interest rates again in the near term and encourage further currency gains. Gains for the Chinese yuan helped trigger wider strength for Asian currencies and provided some support to the yen.
The yen strengthened to highs around 107.15 before consolidating around the 107.70 level with neither currency able to break key technical levels.
Sterling dipped to support near 1.9450 against the dollar and also dipped to lows near 0.7580 against the Euro in European trading on Tuesday. Sterling was able to secure some recovery against the dollar, but this reflected renewed US currency weakness rather than any recovery in UK currency sentiment.
Overall sentiment towards the economy remained weak with further unease over the banking sector, although the results from Barclays were stronger than expected.
MPC member Barker stated that the case for a further near-term cut in interest rates was not compelling given the inflation risks. She was also optimistic that the economic data was still generally positive, although there were important downside risks.
The MPC minutes will be watched closely on Wednesday and Sterling will be vulnerable to further selling if a significant minority called for a 0.50% interest rate cut at the February meeting.
The Swiss franc pushed to highs near 1.09 against the dollar on Tuesday before consolidating around the 1.0940 level. The franc tested levels beyond the 1.61 level against the Euro, but was unable to sustain the gains.
The Swiss National Bank maintained its recent forecast that GDP growth will be around the 2.0% level during 2008, although markets are liable to be less confident over the outlook.
Persistent credit stresses provide some background support to the franc and will remain a key short-term feature.
The Australian dollar has remained strong over the past 24 hours with gains to a three-month high against the US currency at close to 0.9250. The currency has gained further support from hawkish comments from central bank officials. The Reserve Bank minutes stated that there were increased inflation fears and the bank did consider the possibility of a 0.50% rate increase at the February meeting.
In this environment, there will be further speculation that rates will be increased again in March. Commodity prices were also firm on Tuesday which offered support. Nevertheless, there are still important risks associated with the domestic and international economy which will be a negative factor for the currency and it drifted weaker in US trading.