by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to lows near 1.5950 against the Euro on Wednesday, but the Euro struggled to regain any momentum and the US currency stabilised close to 1.59 in early New York before advancing on net positive factors.
US consumer prices rose by a stronger than expected 1.1% in June as energy prices rose strongly to give a 5.0% annual increase which was the highest annual rate for 16 years. There was a 0.3% core increase for the month to give a 2.4% annual increase which will maintain inflation fears within the Federal Reserve and markets.
Minutes from the June FOMC meeting stated that the downside growth risks had eased slightly while the inflation risks had increased. Growth risks were still skewed to the downside, but the net tone was slightly stronger than expected which underpinned the dollar.
Fed Chairman Bernanke effectively repeated his comments from Tuesday in assessing economic conditions. There were remarks that intervention could be considered to counter disorderly markets and this triggered reservations over aggressive short dollar positions.
Industrial production rose 0.5% in June while there was an increase in capacity utilisation to 79.9% from 79.6% the previous month. Oil prices were again an important focus and a decline in crude prices accelerated following an increase in the latest crude stocks data. The dollar strengthened to highs near 1.5810 as US risk appetite improved.
As far as the Euro-zone economy is concerned, there were further warnings over the economic outlook from the Spanish government and overall confidence surrounding Euro-zone growth prospects will remain fragile. The June inflation rate was confirmed at 4.0% while the core rate increased to 1.8% from 1.6% previously.
The yen retained a firmer tone in Asia on Wednesday with support on dips towards the 105.0 level while the Japanese currency gained some further ground against the Euro.
Yield considerations will also remain very important for the currency. The latest data suggested that yen sales by Japanese individuals were at fresh 11-year highs as interest in carry trades remained strong and there will, therefore, be strong yen selling on any further rallies with volatility liable to be a key feature.
The dollar tested levels below 104.0 in European trading before rallying back to near 104.80 as Wall Street advanced and oil prices came under renewed selling pressure.
The UK currency was little changed in early Europe on Wednesday with yield providing some degree of support.
The unemployment claimant count rose by 15,000 in June after a revised 14,300 increase the previous month which was the largest increase for 15 years and will reinforce expectations of a substantial economic downturn.
The earnings growth was little changed at 3.8% over the year which will offer reassurance to the Bank of England, although trends will continue to be monitored closely as wage bargaining becomes a key influence on inflation and inflation expectations.
Sterling weakened following the data and retreated back to below the 2.00 level against the dollar. It was able to regain ground in US trading and pushed to 0.7915 against the Euro as Euro-zone and US fears offered some protection while risk appetite also improved.
The Swiss currency briefly tested levels beyond 1.60 against the Euro on Wednesday as equity markets continued to weaken. The franc also re-tested levels below 1.0050 against the dollar.
Domestically, there was a firm retail sales report with a 7.4% annual increase for May which will provide some degree of franc backing.
The Swiss currency retreated in US trading following a strong rebound in equity markets as energy prices declines. Some speculation over dollar intervention also curbed immediate demand for the franc which weakened to lows around 1.0180 against the dollar.
The Australian dollar had been hampered late on Tuesday by a firmer US currency and a sharp drop in commodity prices. On Wednesday, Reserve Bank Governor Stevens reported that that it was more likely that the economy would slow and the comments clearly suggested that interest rates have peaked.
The remarks pushed the currency weaker and the Australian dollar was then hampered by a renewed decline in commodity prices. The Australian currency will still gain support from existing yield considerations and there is still likely to be strong buying on any significant corrections weaker. Net US gains and lower commodity prices still triggered a dip to 0.9735 in US trading.