by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar pushed to 1.4780 in early Europe on Tuesday ahead of the German data. The US currency was unable to hold the gains and weakened persistently during the day. Selling accelerated once European markets closed with lows around 1.4980 which pushed the currency to fresh record lows against the Euro.
The US data remained generally weak with a particular focus on consumer confidence which weakened sharply to 75.0 in February from a revised 87.3 the previous month. This was the lowest reading for over four years while the expectations index weakened to the lowest level since 1991 which will fuel recession fears.
The Case-Shiller index recorded a 9.1% decline in house prices in the year to December, although this was slightly better than expected. There was a recovery in the Richmond Fed manufacturing index, although it remained negative.
Elsewhere, producer prices rose 1.0% in January with a core 0.4% increase in prices which will maintain concerns over inflationary pressure. For now, markets will be concentrating on the growth risks and the testimony from Fed Chairman Bernanke will be watched very closely on Wednesday. Bernanke will struggle to find a tone which will boost confidence in the US economy.
The German IFO report was stronger than expected with an increase to 104.1 for February compared with 103.4 the previous month. The improvement in confidence will ease immediate fears over the Euro-zone economy, although the fact that the expectations component weakened will limit the positive impact.
Markets will also be on alert over central bank comments over the Euro’s level with European protests likely to increase, especially on any move to above the 1.50 level.
The dollar again tested levels above the 108.0 level against the yen in Asian trading on Tuesday, but was unable to make significant headway.
There was a weaker than expected reading for Japanese corporate prices with a fall of 1.1% in January to cut the annual increase to 0.8%, but international trends have remained dominant. Overall risk tolerances have continued to improve with reduced fears surrounding the US bond insurers helping to trigger a rebound in global stock markets.
Nevertheless, wider dollar pressure allowed the yen to strengthen back to 107.20 in New York even though there was Japanese selling against high-yield currencies.
The improvement in risk appetite will continue to curb yen support on the crosses in the short term, although volatility levels are liable to increase.
Sterling found support on dips towards the 1.96 level against the dollar on Tuesday and strengthened consistently during the day. A weak US dollar and a break of resistance levels above 1.9750 helped push Sterling to highs above 1.9850. Sterling held firm against the Euro with support weaker than 0.7550.
The latest CBI retail survey recorded a decline in sales for February with an index reading of -3 compared with +4 the previous month while expectations for March were also negative. There was also a recorded decline in business investment for the fourth quarter.
Bank of England deputy Governor Lomax warned over growth and inflation risks, maintaining the recent stance by Bank officials. She also stated that the inflation pressures would limit the scope for lower interest rates. Yield considerations will provide some support to the UK currency if credit fears remain at reduced levels.
The dollar was unable to hold above the 1.09 level against the franc on Tuesday. The US currency dipped sharply to lows below 1.08 in New York trading as it came under sustained selling pressure against the European currencies.
The latest Swiss UBS consumption indicator was little changed for January which did not have a significant market impact as it reinforced expectations of an underlying slowdown.
The improvement in underlying risk tolerances curbed demand for the Swiss currency to some extent as equity markets continued to gain ground.
The Australian dollar has retained a firm stance over the past 24 hours and pushed to fresh 3-month highs around 0.93 against the US dollar in local trading on Tuesday. There have not been any significant domestic developments, but overall yield support has remained intact which has provided important support to the currency.
Overall risk appetite has also improved and the recovery in confidence has underpinned short-term capital flows into the Australian currency. These positive influences could continue in the very short term, but there are still clear dangers surrounding the global economy. Sustained US currency weakness allowed the Australian dollar to strengthen to 0.9325 in US trading.