by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to lows around 1.5890 against the Euro on Friday, but then recovered ground. Technical levels failed to break with the US currency hitting tough selling pressure close to the 1.58 level and consolidating around 1.5850 in subdued trading.
Oil prices were again a significant focus and an announcement from the Secretary of State that the US diplomatic stance towards Iran nuclear talks had shifted put some downward pressure on oil prices which also provided some degree of support for the US currency.
There were no US data releases during the day which ensured a further focus on the financial sector. After being unsettled by weaker than expected earnings from Merrill Lynch late on Thursday, the results from Citigroup provided some relief as losses were lower than expected.
Any shift in sentiment towards the US financial sector would help underpin the dollar to some extent, although there will continue to be fears over mounting loandefaults as the economy remains weak.
The Euro-zone trade account moved into deficit for May with a headline EUR4.3bn shortfall after a small surplus the previous month. The immediate impact will be limited, although there will be some unease over the competitive position. The PMI data will be watched very closely next week for further evidence on the Euro-zone economy.
Bankof Japan Governor Shirakawa stated on Friday that the central bank was treating the upside inflation risks and downside growth risks equally, but minutes from the latest policy meeting indicated that most members were more concerned over downside growth risks.
The minutes will reinforce market expectations that the bank will not increase interest rates and this will continue to expose the yen to potential selling pressure on yield grounds.
Although Japan is a big net oil importer, the impact of lower oil prices is liable to be a slight negative factor the Japanese currency as risk appetite would improve which would increase interest in carry trades. The dollar found support below 106.0 on Friday and pushed to highs near 107.0 following the Citigroup results.
Sterling was unsettled slightly by reports that the government could relax the fiscal rules and increase borrowing, especially as the latest monthly borrowing requirement was higher than expected. The impact should be limited as the Bank of England would be less likely to cut interest rates if the government shifts policy.
Sterling was holding just below the 2.00 level in early Europe on Friday before drifting weaker with lows close to 1.99.
MPC member Gieve made similar remarks to Sentence the previous day in a speech on Friday with comments that the bank will want to maintain a very tough stance on inflation expectations. He also repeated the warning that inflation could move significantly above the 4.0% level. The strong 2.0% monthly increase in M3 money supply growth will also unsettle the central bank to some extent as rapid monetary expansion does not suggest that policy is too restrictive.
Speculation over higher interest rates will provide some degree of support if the economy does not appear to be deteriorating further.
The Swiss francweakened slightly during Friday, although the Euro found further resistance above the 1.62 level. The US currency was also unable to strengthen above the 1.0250 level and the franc edged stronger later in the day.
Overall risk appetite was again slightly weaker which curbed franc demand, although the impact was measured. A sustained recovery in risk appetite would tend to maintain a softer tone for the Swiss currency.
TheSwiss bankingsector will remain an important focus with fears that tighter regulation will undermine growth.
The Australian dollar found support above the 0.97 level against the US dollar in local trading on Friday, but gains were capped below the 0.98 level.
There was a lower than expected increase in second-quarter import prices, but this is not likely to have a significant policy impact.
Commodity pricesremained a significant focus and a renewed decline in gold prices put downward pressure on the Australian currency in New York trading. There will still be important buying support on dips given the international interest in yield which will offset the impact of any further decline in commodity prices.