by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to lows of 1.5970 in early Asian trading on Monday. In a statement on Sunday, the Treasury announced that it would boost the companies’ access to credit lines and inject capital if necessary in an attempt to boost confidence that the current structure can be sustained. Immediate sentiment improved and the US currency strengthened to highs just beyond 1.5850.
There were no significant US data releases on Monday, but there are a series of scheduled releases on Tuesday which will provide further important evidence on the US economic conditions with a particular focus on retail sales.
The testimony from Fed Chairman Bernanke will also be watched very closely on Tuesday and could be extremely important for near-term market direction, especially in view of the increased financial-market stresses.
If Bernanke concentrates on economic risks and dampens any prospect of higher interest rates then there would tend to be renewed dollar selling pressure. A robust stance on inflation would underpin the dollar and any comments on the US currency will also be watched very closely.
The German ZEW confidence data will also be important for market sentiment on Tuesday following a renewed downturn last month. A further slide in the index would reinforce fears over a sharp downturn in the Euro-zone economy.
There will also be further fears over capital outflows from the Euro area following the increased InBev bid for Anheuser-Busch and the Santander bid for UK group Alliance & Leicester.
Underlying unease over the US financial sector was still a dominant influence and the dollar weakened back to 1.5920 later in US trading.
Financial-market stresses eased slightly in Asian trading on Monday with the dollar recovering to 106.55 against the Japanese currency. There is also still strong interest in selling the yen on rallies as investors look to boost yields.
The Bank of Japan will announce its interest rate decision on Tuesday with expectations that rates will be held at 0.50%. Any move to a tightening bias by the bank would provide some near-term support to the yen, although this looks unlikely.
The dollar pushed higher to 106.80 in Europe on Monday. The US currency struggled to sustain the gains as risk appetite was still very fragile with renewed declines to 106.00 in US trading as an initial bounce in US financial stocks reversed.
The UK currency was holding close to 0.80 against the Euro in early Europe on Monday while it was slightly lower against the dollar as US financial risk continued to dominate. A bid approach for the Alliance & Leicester banking group by Spanish group Santander provided some Sterling support on expectations over merger-related capital inflows while sentiment also recovered slightly.
UK input producer prices rose 2.1% in June with output prices rising 0.9% over the month while core increases were subdued at 0.3%. The monthly rate of increases slowed compared to May and was below market expectations. The annual rates were, however, 30.3% and 10.0% respectively which will maintain inflation fears and limited initial selling pressure.
The consumer inflation release will be watched very closely on Tuesday as the data will have a key impact on interest rate expectations. A lower than expected increase would undermine near-term Sterling support with increased speculation that the Bank of England would be able to move towards an interest rate cut within the next few months.
Bank of England Governor King warned that the economy would have to slow to bring inflation down and higher core inflation would increase policy difficulties.
The Swiss franc weakened to lows around 1.6240 against the Euro on Monday as global stock markets recovered and immediate financial-sector fears eased, but the currency secured renewed gains later in US trading as an initial Wall Street rally faded.
The franc pushed back to 1.6170 against the Euro and also strengthened to 1.0180 against the dollar from 1.0250.
Overall risk appetite will remain lower in the short term and this will tend to support the franc, especially as financial-sector de-leveraging continues.
The Australian currency tested levels above the 0.97 level against the US currency on Friday before retreating back below this level. There were no major domestic influences on Monday as the focus remained fixed firmly on international trends with consolidation around 0.9675.
There is still evidence of global interest in yield which will continue to provide some important support to the Australian currency. As the US currency weakened again, the Australian dollar challenged 25-year highs above 0.9720 in New York.