by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar challenged levels stronger than 1.48 against the Euro on Monday, but was unable to sustain the break below this level. The dollar weakened back to around 1.4825 with markets struggling to find direction.
Markets continued to monitor the developments in the financial sector and especially the news surrounding bond insurer Ambac. Agreement on a support package would provide some relief over the US financial sector as it would strengthen the case for ratings on the insurers to be maintained. The dollar impact of a positive outcome would be mixed as increased confidence in the financial sector would be offset by a decline in defensive demand for the US currency.
The US existing home sales data recorded a small decline to an annual rate of 4.89mn in January from a revised 4.91mn the previous month, although this was slightly above market expectations. Inventories rose slightly further over the month while prices fell 4% over the year. There will be some relief over the headline figure, but the data as a whole will not provide and strong support with economic fears persisting.
Former Fed Chairman Greenspan warned over the economy which unsettled the dollar slightly while Governor Mishkin was confident that inflation pressures could be contained. Comments from Fed officials will remain under close scrutiny over the next few days.
Euro-zone economic confidence will remain fragile with reports that the ECB was set to downgrade its GDP forecasts. The German IFO index will be watched closely on Tuesday and a robust reading would help support the Euro.
Immediate yen demand was dampened on Monday by hopes for an Ambac rescue plan which improved risk tolerances. The Nikkei index also strengthened to a six-week high on Monday following a 3.1% daily rise and any sustained improvement in risk tolerances would tend to undermine the yen.
Risk appetite remains higher during European and US trading on Monday with the yen weakening to test levels beyond 108 against the dollar while the Japanese currency also weakened to beyond 160.0 against the Euro.
The Nikkei gains, however, also reflected speculation over US$20bn in investment from the Chinese sovereign funds which will provide some underlying currency support over the next few weeks.
A firmer US dollar trend helped push the UK currency down towards 1.9630 in early European trading on Monday.
The latest Hometrack house-price survey reported a further 0.2% decline in UK house prices for February which was the fifth successive decline.
The BBA reported a small increase in mortgage approvals for January which provided some relief, although the rise primarily reflected rising re-mortgaging activity rather than new loan approvals. Underlying confidence will remain fragile with expectations of a sustained underlying slowdown in the housing sector. There will also be persistent fears over consumer spending trends following some weak retail spending reports.
The UK currency was able to push back towards 1.97 against the dollar before consolidating around 1.9670 and a sustained improvement in risk appetite would tend to underpin Sterling.
The dollar found support below the 1.0850 level against the dollar on Monday, but was unable to sustain gains above 1.09 as rallies quickly attracted selling interest. Similarly, the Euro failed to hold gains beyond the 1.6150 level against the franc.
The franc was undermined to some extent by an improvement in risk appetite as equity markets rallied, although the moves were still relatively cautious.
An easing of fears over the US bond insurance sector would also tend to undermine short-term Swiss currency demand.
The Australian dollar found strong support on dips and strengthened back to 0.9250 against the US dollar in early Europe on Monday. Yield support remained intact which underpinned the Australian currency, especially with expectations of further domestic interest rate increases.
The currency also gained support from higher metal prices and a recovery in risk appetite. These trends may still be difficult to sustain given the underlying credit fears, but higher global equity markets helped maintain the Australian currency close to the 0.9250 level.