by Darrell Jobman, Editor-in-Chief TraderPlanet.com
There were further concerns over the US financial sector with a fresh batch of rumours surrounding Lehman Brothers which undermined dollar confidence in US trading. There were also continuing fears over the US mortgage companies with finance companies Fannie Mae and Freddie Mac falling again after remarks from Regional Fed Governor Poole that the companies could be insolvent.
Fed Chairman Bernanke concentrated on financial risk and potential longer-term reforms to help strengthen the banking sector with a particular emphasis on raising additional capital. Treasury Secretary Paulson stated that markets will take additional time to stabilise while he also stated that some financial firms must be allowed to fail. These comments reinforced market fears over the financial sector.
Initial US jobless claims were sharply lower than expected with a decline to 346,000 in the latest week from 404,000 previously. The decline may have been caused to a major degree by seasonal considerations in the auto sector which will lessen the impact and there was a larger than expected increase in jobless claims which will reinforce fears that it is more difficult to find jobs.
The European data continued to record a sharp decline production with sharp monthly drops for Franc and Italy in the latest monthly data. Despite monthly volatility, overall confidence in the Euro-zone is liable to weaken which will hamper the Euro.
The dollar was trapped in relatively narrow ranges during Asian trading on Thursday.
Domestically, the latest wholesale prices data recorded a further increase in the annual rate to 5.6% in June from 5.3% the previous month, although the core increase was held to below 2.0% as energy prices continued to rise. There is still little evidence that there will be a near-term impact on Bank of Japan policy and the yen will remain vulnerable on yield grounds.
Credit fears persisted on Thursday with further unease over the US mortgage sector which will tend to discourage aggressive currency plays, but there is still scope for an underlying flow of funds into high-yield currencies, especially after robust Australian employment data.
The dollar pushed to highs near 107.50 against the Japanese currency, but was unable to sustain the gains as renewed unease over the banking sector unsettled the US currency.
The UK currency again hit selling pressure above the 1.98 level against the US dollar on Thursday. The Halifax Bank reported a further 2.0% decline in house prices for June with a 6.1% annual decline which will reinforce a lack of confidence both in the housing sector and the economy as a whole.
Following the latest MPC meeting, the Bank of England left interest rates on hold at 5.0%. There was no statement following the decision and the breakdown of the vote was also not revealed.
Overall confidence is likely to remain weak in the short term which will remain a negative influence on Sterling, limiting the beneficial impact of yield support. Reserve diversification may provide some degree of support to the UK currency, but it still weakened to 0.7980 against the Euro.
The dollar again hit resistance close to the 1.0340 level against the franc on Thursday and weakened back to lows near 1.0250 in US trading.
The latest UBS industrial survey suggested still firm demand, but this failed to have a significant impact. There were further concerns over the global financial sector and lower risk appetite should underpin the franc on defensive grounds.
The Swiss franc still struggled to secure significant benefit with the Euro finding support below the 1.62 level which suggest that overall currency demand is relatively subdued.
In contrast to recent days, the domestic data was stronger than expected with unemployment falling to 4.2% in June from 4.3% while there was a larger than expected employment increase of close to 30,000. The stronger data pushed the currency to highs near 0.9620 against the US dollar.
The data will ease fears over the economy, at least for now, although underlying fears could quickly return. The Australian dollar will also gain some support if there is a recovery in commodity prices, although volatility is liable to be a key feature. The currency overall is still liable to prove brittle as the underlying risks profile is still high.