by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was unable to sustain a move through the 1.38 level against the Euro on Thursday and weakened back to 1.3830 before settling back close to 1.38 later in US trading.
The dollar is still being undermined by fears surrounding the mortgage sector and the impact on the wider economy. In the second part of his congressional testimony, Fed Chairman Bernanke’s comments were similar to those of Wednesday, although his overall tone was slightly more optimistic over the housing sector. This helped cushion the dollar from aggressive selling with reduced expectations of a rate cut late this year. Nevertheless, overall sentiment will remain fragile in the short term given fears over a prolonged negative growth impact.
The minutes from June’s FOMC meeting confirmed that the Fed’s main concern was inflation. The minutes stated that housing was a major area of uncertainty, but members were also concerned over the risk of rising inflation expectations. The increase in energy prices since the meeting will reinforce inflation concerns and keep the Fed on alert.
US jobless claims fell to 301,000 in the latest week from 309,000 the previous week which will maintain optimism over the labour market. The evidence of firm employment should help ease immediate concerns over the sub-prime sector.
The Philadelphia Fed index fell to 9.2 in July from 18.0 the previous month, although the underlying components were still firm.
Yen
The yen was unable to make a fresh challenge on 121.50 against the dollar on Thursday and weakened back towards 122.20 while the Japanese currency also drifted weaker to near record lows against the Euro.
The Japanese all-industries index fell 0.3% in May while the monthly Tankan index fell to 28 from 31 the previous month. The data should not have a major impact on the yen, especially as rising energy prices will maintain pressure for higher interest rates to curb inflation expectations.
The Chinese economic data was strong with a second-quarter GDP growth of 11.9%. The increase in consumer inflation to 4.4% for June from 3.4% as food prices rose strongly will also maintain pressure for a further Chinese monetary tightening. An interest rate increase would support the yen through general Asian currency gains and underlying pressure to reduce carry trades.
Sterling
Sterling weakened after the UK economic data on Thursday, but was able to resist heavy selling pressure and was still holding close to the 2.05 level against the dollar in US trading.
UK retail sales rose 0.2% in June with the annual increase slowing to 3.4% which was marginally below expectations. There was a net slowdown in lending and money supply growth which will reinforce expectations that consumer spending growth is slowing. The data will increase speculation that the Bank of England will be able to leave interest rates on hold in the short term to assess on-going growth and inflation trends. UK rate expectations are liable to be revised down slightly which will curb Sterling buying, although the short-term impact should be measured.
Bank of England Governor King stated that inflation would fall during 2007 while MPC member Besley maintained a tough stance on inflation and monetary policy.
US sub-prime difficulties will tend to provide short-term Sterling support against the dollar, but there is also the threat of serious UK property-related difficulties which will limit the positive Sterling impact.
Swiss franc
The Swiss currency was unable to make any headway against the Euro during Thursday and weakened to test the 1.66 level. The franc was also unable to sustain any move through the 1.20 level against the dollar with a move back to 1.2025.
Short-term currency moves will remain strongly correlated with global stock market moves and further gains on Wall Street helped undermine the franc on Thursday.
The Swiss trade surplus strengthened to CHF1.72bn in June from CHF1.05bn the previous month with a 12.8% real increase in exports over the year. The robust trade data will reinforce confidence in the Swiss economy and support the currency.
Australian dollar
The Australian dollar has continued to probe 18-year highs above the 0.88 level against the US dollar over the past 24 hours, holding just below this level in US trading on Thursday.
The Australian currency is also still gaining strong support from the level of commodity prices. Asian monetary policies be monitored closely as an increase in Chinese interest rates would be likely to undermine the Australian currency on fears over slower global growth.
A general increase in risk aversion would also increase the risk of a corrective pull back for the Australian currency.
