by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to strengthen through the 1.5750 level against the Euro on Friday and weakened sharply to lows around 1.5945 in early UStrading with the trade-weighted index at a 10-week low.
There were further serious concerns over the US financial sector as the mortgage finance companies Fannie Mae andFreddieMaccame under heavy selling pressure. Share prices for the companies fell by around 50% on fears over mounting losses.
There was also increased speculation that the companies would require government support. Although a rescue package could boost sentiment, there would be increased fears over the increase in government debtwhich would risk a further erosion of longer-term dollar confidence. There were reports that the Fed would allow the companies to access the discount window, but this failed to provide significant relief and overall confidence in US assets was very fragile.
Amid the financialstresses, the economic data failed to have a significant impact. The trade deficit was lower than expected with a decline to US$59.8bn for May from a revised US$60.5bn the previous month.
The University of Michigan consumer confidence index rose marginally to 56.6 in the preliminary July meeting from 56.4 the previous month, although it remained stuck at historically very low levels which will not have a positive influence on the currency.
The dollar decline came in tandem with a rise in oil and commodity prices with crude touching record highs and there will be increased unease over market trends within the major central banks. There will also be greater fears of a downturn within Europe which will reinforce apprehension over a strong Euro and markets will be on high alert over potential intervention or much stronger rhetoric to back the dollar.
Domestically, there was a fall in reported consumer confidence to a record low and there are strong expectations that the Bank of Japan will leaveinterest rateson hold at 0.50% next week.
The yen is still struggling to gain any sustained support on any increase in risk aversion and this suggests that there is still strong interest in pushing funds overseas to boost yields.
In this context, the yen remained trapped close to record lows against the Euro which was also stifling any yen advance against the dollar in Asia.
Risk aversion increased again later on Friday with renewed fears over the US financial sector. The US currency weakened to lows around 105.65 from 107.20 before a tentative recovery. The yen retreated to 106.20 as Wall Street pared losses and the yen remained under pressure against the Euro.
The UK currency was dominated by dollar trends on Friday. Sharp losses for the US currency pushed Sterling to a high of 1.9950 before a retreat towards 1.9860 later in New York. Sterling found support close to 0.80 against the Euro for most of the day, but dipped through this level late in US trading as liquidity declined.
Overall confidence in the UK economy will remain weak with further report of weak retail sales and a sustained increase in recession fears.
The UK inflation data will be a key focus next week with reports on producer and consumer prices. Lower than expected readings for the main indices would revive speculation that the Bank of England would be able to cut interest rates later this year which would also tend to undermine Sterling.
The Swiss franc found support close to 1.6250 against the Euro on Friday and strengthened to highs near 1.6150 as equity markets came under substantial selling pressure. The franc also strengthened to highs near 1.0140 against the dollar before a limited correction.
The Swiss currency will gain support on a decline in risk appetite with a move into more defensive currencies, although it failed to hold the best levels.
The increase in credit-related stresses will still pose some important risks to the Swiss economy and the banking-sector trends will be watched closely over the next week.
There was little change in the Australian dollar in local trading on Friday with no domestic releases to trigger any further currency shift with consolidation below 0.96 against the dollar. The data for the week as a whole was mixed and there will be some unease over forward-looking indicators which will limit currency support.
The Australian dollar will still gain some initial support from high commodity price and the flow of funds into high-yield instruments.
A renewed surge in oil prices and a weaker US currency pushed the Australian dollar to highs near 0.9720 in US trading on Friday before a retreat to 0.9660.