by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened through the 1.50 level against the Euro in Asian trading on Wednesday and remained under pressure throughout the day. The US currency weakened to record lows near 1.5150 before a slight correction.
The US economic data flow remained weak with durable goods orders falling 5.3% in January after a 4.4% increase the previous month. Underlying orders fell by 1.6% over the month which will reinforce a lack of confidence in the industrial sector.
New home sales fell to an annual rate of 588,000 in January from 605,000 the previous month. The pattern was similar to that for the existing homes data with prices falling. There was a further rise in inventories as a proportion of sales even though the actual number of units for sale declined.
Fed Chairman Bernanke repeated recent comments that there were downside risks to the economy with a significant slowdown in consumer spending while he pledged that the Fed will take further action if required. Bernanke, however, also stated that the net inflation risks were to the upside while, later in 2008, the Fed would have to judge whether interest rates had been cut enough. The Fed Chairman also pointed to bright spots such as exports and the fiscal stimulus, although the overall stance suggested further rate cuts.
Markets overall will continue to expect a further rate cut of at least 0.50% at the March FOMC meeting which will tend to keep the dollar on the defensive, although this should by now be priced in.
French Finance Ministry sources stated that the Euro was at a painful level, but there was no aggressive verbal intervention against the currency moves. ECB member Weber also took a firm stance on inflationary pressure. Nevertheless, protests against Euro strength are likely to increase in the short term.
The yen strengthened towards the 106.0 level on Wednesday as US dollar weakness was the principal market factor. The yen was unable to sustain a recovery beyond 160.0 against the Euro.
The Nikkei index continued to edge higher on Wednesday and investor confidence also recovered for February according to the latest institutional survey which undermined yen support to some extent. The strength in oil prices was also a negative factor for the Japanese currency.
Comments from Japan officials will be watched closely if the yen strengthens towards the 105.0 level, especially as the Japanese economy has been weakening, although strong protests by the Finance Ministry look unlikely at this stage.
Sterling pushed to highs above 1.9950 against the dollar on Wednesday, but quickly retreated back through the 1.99 level and dipped to lows around 1.9815 in New York. The UK currency was also under pressure against the Euro with a retreat to beyond 0.7630 which represented a fresh record low for Sterling.
The UK currency was undermined by a lack of confidence in the financial sector after disappointing results from HBOS and speculation over more serious difficulties within the banking sector.
Bank of England deputy Governor Gieve reported that financial markets have remained difficult in 2008, but that policy needs to be set for the economy as a whole. The remarks overall continue to suggest that the bank will look to cut interest rates slowly. The UK currency should, therefore, some support on yield grounds, but confidence will remain very fragile in the short term.
The dollar remained under pressure against the Swiss franc on Wednesday, weakening to a new record low of 1.0610 in New York. The Swiss currency was also able to secure net gains against the Euro to 1.6075.
Unease over the European financial sector provided some degree of background support to the Swiss currency, especially as equity markets corrected weaker after recent gains.
The Australian dollar has retained a firm tone over the past 24 hours as the US currency has remained under heavy selling pressure. Domestically, there was a 1.0% decline in construction output for the fourth quarter, but this failed to have a significant impact with markets still speculating over an increase in interest rates at the March Reserve Bank meeting.
The Australian dollar will also draw short-term support from the high level of commodity prices. The Australian currency will, however, be exposed to the threat of profit taking and there is also a clear threat of complacency over economic conditions. US dollar weakness remained the dominant influence and this allowed Australian gains to 0.9425 in New York.