by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found some support weaker than the 1.52 level against the Euro on Friday, but was unable to make strong headway as consolidation dominated following the sharp losses this week. There was also caution ahead of a series of key events next week.
Global financial risk was generally higher during the day with fears over further debt write-downs. Although the yen and Swiss franc gained most support, there was some reluctance to sell the dollar aggressively.
The Chicago PMI index continued the recent trend of sharp deterioration with a drop to 44.5 in February from 51.5 the previous month. The national PMI manufacturing index will be watched closely on Monday and it will be a big surprise if the index is able to hold above the key 50.0 level.
The revised University of Michigan consumer confidence index edged marginally higher to 70.8, but remained at an historically depressed level. The core PCE inflation index increased by 0.3% in January with the annual increase at 2.0%. Given that inflation indicators are edging higher, fears over stagflation will persist in the short term.
The latest sales German retail sales data was stronger than expected on Friday with a 1.6% monthly increase for January which will underpin confidence. There were again no major protests against Euro strength from European officials during the day.
Bernanke’s warnings over the banking sector, allied with weaker than expected results from AIG, increased risk aversion and boosted the yen in Asian trading on Friday. The Japanese currency strengthened to beyond the 105.0 level against the dollar.
Domestically, the economic data failed to have a major impact with core consumer prices rising 0.8% in the year to January. Consumer spending rose 3.6% in the year to January while the unemployment rate held at 3.8% for the month. The data may offer some reassurance over the economy, although confidence will stay fragile and global conditions are liable to remain dominant.
The yen secured further gains in European trading as confidence towards the financial sector remained weak. There was a fresh 3-year peak beyond the 104.0 level before a marginal dollar recovery, while the yen strengthened significantly against the Euro.
Sterling weakened to fresh record lows against the Euro on Friday, but strengthened back to 0.7640 from lows near 0.7680. The UK currency found support below 1.98 against the dollar with selling interest above 1.99 in choppy trading.
The latest UK economic data had a softer tone and provided no support to the currency. The Nationwide Bank reported that house prices fell by a further 0.5% in February with the year-on-year increase falling to 2.7%.
Elsewhere, consumer credit demand remained subdued for January while net lending was also weaker than expected which suggests a significantly more cautious approach from consumers. Mortgage approvals edged higher for January, although there was still a substantial decline compared with the previous year.
The latest PMI data will be watched closely on Monday and a reading below the 50.0 level would trigger some speculation that the Bank of England could cut interest rates again next week.
The Swiss franc retained a strong tone against the major currencies on Friday. The franc strengthened to new record highs around 1.0425 against the dollar and also advanced to 1.5850 against the Euro.
Levels of risk aversion were higher during the day due to increased fears over the banking sector and this provided important support to the Swiss currency.
The near-term moves will tend to be dominated by the degrees of stress within the financial sector and the trends in credit markets.
The Australian dollar pushed to a fresh 24-year peak close to 0.95 against the US currency. The domestic influences remained limited, but expectations of a Reserve Bank interest rate increase next week continued to provide important underlying support.
The Australian currency was also boosted by the strength of commodity prices. The degrees of financial risk will remain important and the currency will be vulnerable to selling pressure if confidence continues to deteriorate.
These risks were illustrated on Friday with a sharp retreat to near 0.93 against the US dollar before a recovery to 0.9360.