by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar strengthened to near 1.3780 against the Euro on Friday, but was unable to hold the gains and weakened sharply in US trading as stop-loss levels were triggered. The dollar weakened to lows around 1.3840 before finding support and pushing back to near 1.3820.
Wall Street dipped sharply on Friday with renewed fears over mortgage-related losses. Sub-prime fears will, in turn, increase concerns over the threat of capital flows out of US corporate bonds and sentiment will remain very fragile in the short term. In this context, the housing data will be watched closely later next week with data on existing and new home sales due for release. A further slide in sales would maintain fears over the housing sector.
Dollar sentiment will also tend to remain weak in the short term. Markets have, however, now discounted a substantial amount of bad US news which should provide some significant dollar protection from aggressive selling as the wider economy is still performing well. Any sustained increase in risk aversion would also provide some dollar support with a switch back into US Treasury bonds and away from emerging-market investments.
Markets will also need to be on alert for exchange rate comments from European officials. ECB Chairman Trichet stated that the longer-term growth outlook is subject to downside risks and, although similar comments have been made before, the remarks will generate some speculation that the ECB is becoming less confident over the growth outlook. There will also be property concerns surrounding the Euro-zone economy.
Yen
The dollar was unable to sustain gains above 122.30 against the yen and the Japanese currency strengthened sharply in US trading on Friday. The dollar fell rapidly to lows below the 121.0 level before a recovery back to 121.20.
The recent strength in global stock markets has supported risk tolerance levels and reduced near-term demand for the yen. Investors turned significantly more risk averse again in US trading on Friday which supported the Japanese currency as Wall Street dipped sharply.
The latest weekly capital account data recorded a small net deficit which should limit the scope for a strong near-term recovery in the yen, although the sharp moves on Friday illustrate the fact that underlying sentiment could reverse rapidly.
The yen will tend to gain slightly from the Chinese monetary tightening with interest rates being increased by 27 basis points on Friday. As far as Japanese interest rates are concerned, the governing coalition is still behind in opinion polls for the July 29 Upper-House elections. This will raise some speculation that the Bank of Japan will come under pressure not to increase interest rates in August, although the most likely outcome is that rates will be raised.
Sterling
Sterling found support below the 2.05 level against the dollar on Friday and strengthened to fresh 26-year highs above 2.0560 in US trading as the dollar came under fresh selling pressure. The UK currency was little changed against the Euro.
Provisionally, UK GDP rose 0.8% in the second quarter of 2007 to give annual growth of 3.0% while the rate of services-sector growth eased slightly in the three months to May.
The data will help underpin near-term confidence in the economy, although there will still be concern over the more forward-looking indicators. Indicators of housing strength will be watched closely next week with any evidence of a downturn undermining Sterling.
Swiss franc
The Swiss currency weakened to lows around 1.6630 against the Euro on Friday before strengthening back to 1.6590 while the franc also strengthened back to test levels below 1.20 against the dollar after lows close to 1.2060.
Short-term currency moves will remain strongly correlated with global stock market moves. Gains on Wall Street helped undermine the franc for much of the week, but the position was reversed on Friday as global markets faltered and there was a renewed increase in risk aversion.
Swiss producer prices were unchanged in June with the year-on-year rate held at 2.8%. The data dampened expectations of a more aggressive National Bank stance, although the central bank is still likely to increase interest rates in September.
Australian dollar
The Australian dollar has remained strong over the past 24 hours, strengthening to test 18-year highs against the US dollar above the 0.88 level. The currency pushed to a high of 0.8830 before weakening back to 0.8790 later in US trading.
Commodity prices have remained firm over the past 24 hours with metals prices strengthening to a 6-week high and further gains would provide further short-term Australian dollar support.
The local currency will still be vulnerable to profit taking, especially after China sanctioned another increase in interest rates, and a sustained increase in risk aversion would undermine the Australian currency.
