by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to make any significant headway against the Euro on Thursday and weakened to fresh all-time lows in US trading.
The revised US GDP growth estimate for the fourth quarter was held at 0.6% compared with expectations of a small upgrade while the inflation estimate edged higher which reinforced fears over stagflation. Jobless claims increased to 373,000 in the latest week from a revised 354,000 previously and the number of continuing claims also increased again which suggested that the labour market was weaker.
Fed Chairman Bernanke took centre stage for the second day running as he concluded his congressional testimony. His prepared comments were the same as on Wednesday, but the Fed chief was generally downbeat on prospects.
In particular, Bernanke warned that the US economy was in a weaker position than when entering the 2001 recession while warning that there were likely to be some bank failures. In this environment, markets continued to price in further interest rate cuts. The remarks and lack of yield support fuelled bearish dollar sentiment and pushed the US currency to a low around 1.5230 against the Euro.
There were again only muted protests against Euro strength from European officials which lessened the immediate risk that long Euro positions would be scaled back. The latest German retail PMI index was also stronger than expected, but the sales report will still be watched closely on Friday.
Markets will also be on alert over the potential for intervention warnings given that markets are threatening to become disorderly, although the main Euro threat may come from evidence of divergence within the Euro-zone economies.
The dollar was unable to strengthen back towards the 107.0 level on Thursday and weakened to lows near the important 105.0 support level in US trading as the dollar remained under severe pressure.
Domestically, Japanese industrial production fell by 2.0% in January, reinforcing evidence of a deteriorating growth environment, although there was still a 2.5% annual increase while retail sales were boosted by higher energy prices. Bank of Japan member Mizuno did little to allay growth fears, but also opposed an interest rate cut.
The strength of commodity prices will maintain the potential for capital outflows from the yen, although caution is still likely to prevail. The yen also secured a boost from increased fears over the global financial markets.
Sterling was unable to strengthen back through 0.76 against the Euro during Thursday and weakened to new all-time lows around 0.7640 as there was a fresh Euro surge. The UK currency found support weaker than 1.98 against the US currency and pushed to highs near 1.9950.
The Royal Bank of Scotland results were broadly in line with expectations and provided some initial Sterling relief, but underlying confidence remained very fragile with persistent unease over the financial sector.
The latest consumer confidence data was released early and recorded a further decline to a record low of -17 from -13 the previous month. Weaker confidence will reinforce expectations of a sustained downturn in consumer spending.
Comments from MPC officials were generally mixed with Besley pointing to inflation risks while Bank of England Deputy Governor Gieve focussed more on the growth risks. Markets, for now, will continue to expect a further cut in interest rates during the second quarter.
The franc remained very robust on Thursday, pushing to fresh record highs beyond 1.05 against the dollar while the Swiss currency also strengthened to beyond the 1.60 level against the Euro.
Financial risk was again a significant feature with a lack of confidence in the global markets contributing to fresh demand for defensive currencies even though global stock market falls were contained.
Employment levels held firm in the fourth quarter of 2007, although there will not be a significant market impact.
Source: VantagePoint Software, Market Technologies, LLC
The Australian dollar has remained strong over the past 24 hours as US currency weakness has dominated. Domestically, there was a 5.1% increase in capital spending for the fourth quarter which reinforced expectations that the Reserve Bank would increase interest rates.
International factors were also supportive with high commodity prices reinforcing the Australian dollar’s appeal. There are still important risks surrounding the global economy and the Australian currency has priced in a substantial amount of good news. If the Reserve Bank decides against a rate hike, the Australian dollar will be vulnerable to a deeper correction.
Dollar weakness dominated in US trading with the Australian dollar pushing to highs near the 0.95 level.