by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened back to beyond 1.48 against the Euro in early US trading on Wednesday, but then strengthened sharply as European markets drew towards a close. The Euro weakened to lows near 1.4600 before recovering to 1.4650.
US consumer prices rose 0.3% in December compared with expectations of a 0.2% increase with a core increase of 0.2% which gave an annual underlying increase of 2.4%. There was no change in industrial production over the month which was slightly above expectations, although the immediate impact should be limited.
The latest US capital account data recorded net long-term inflows of US$90.9bn from US$114bn the previous month. Long-term inflows were, therefore, again higher than the US trade deficit which will provide some underlying dollar support.
The Fed’s Beige Book reported that activity had moderated while consumer spending was subdued. The report also stated that the labour market was still relatively tight. The overall tone of the Beige Book did not support the extreme pessimism that has been evident on the economy and there is liable to be some adjustment of expectations which will help cushion the US currency.
ECB member Mersch stated that the downside risks to the Euro-zone economy had increased while the bank could downgrade its 2008 GDP growth forecasts. Mersch also stated that the ECB would need to act with caution given the economic uncertainties. The comments will reinforce unease over a slowdown in the Euro-zone economy while there will also be much reduced speculation that the ECB will be in a position to increase interest rates.
The yen strengthened to a 30-month high near 106.0 against the dollar in Asian trading on Wednesday. Risk aversion remained at elevated levels with the Nikkei index continuing the trend of falling stock markets. With volatility higher, there was also greater caution over carry trades which underpinned the yen.
Risk conditions gradually improved during the day and the Japanese currency weakened back towards 107.90 in US trading.
The Japanese machinery orders was slightly stronger than expected with the decline held to 2.8% for the month while wholesale prices were higher. Japan will not be immune to fears of weaker growth at the same time as higher inflationary pressure with consumer confidence at a 5-year low.
Markets will be on high alert over protests against yen strength from Japanese officials. A lack of comment would increase speculation that further yen gains will be tolerated by Japan.
The latest RICS housing survey registered the weakest reading for 15 years as the headline index fell to -49.1 from -40.6 previously and this helped put the UK currency under fresh pressure in Asian trading on Wednesday.
Sterling then found support below 1.9550 against the dollar and pushed to highs above 1.97 before weakening back towards 1.9610. The UK currency secured gains against the Euro with highs near 0.7450.
The annual increase in earnings increased slightly to 4.0% in November from 3.9% previously with a further decline in unemployment of 6,400 for December which should not have a significant impact. Markets will still be expecting that the Bank of England will lower interest rates in February as growth risks take priority over the persistent background inflation risks.
Sterling should prove slightly more resilient given the amount of housing deterioration and interest rate cuts already priced in with volatility levels liable to remain high.
The Swiss currency remained very strong in early European trading on Wednesday with gains to record highs beyond 1.0850 against the US dollar while the franc also tested levels beyond 1.61 against the Euro.
Global risk conditions remained the dominant influence and a sharp decline in Asian stock markets helped underpin the Swiss currency.
Conditions eased in US trading which helped trigger a franc correction after recent very strong advances and the dollar pushed back to above 1.10.
Initially, the Australian currency was undermined on Wednesday by a move out of carry trades. Domestically, there was a fall in domestic consumer confidence which undermined sentiment slightly, although risk conditions were dominant.
The Australian dollar dropped to lows just below 0.8750 before recovering back to the 0.88 level. Defensive considerations will remain very important in the short term and this will tend to undermine the Australian currency. There was, however, some relief in US trading as the yen weakened and the main short-term feature is liable to be choppy trading.