by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to lows around 1.3850 against the Euro before recovering back towards the 1.3825 level later in US trading with the trade-weighted index also bouncing marginally from levels near a 15-year low.
The US currency was undermined by a persistent lack of confidence in the economy as Wall Street fell. There was, however, also evidence of a wider increase in risk aversion and this provided some dollar support as emerging-market currencies weakened. A wider and more prolonged shift into defensive assets would provide some limited dollar support with a flow into US Treasuries.
There was no significant economic data on Tuesday, but there were further concerns over the impact of mortgage difficulties with an earnings warning from Countrywide Financial reinforcing financial-sector concerns. The US housing data will be watched very closely on Wednesday and a further drop in existing home sales would continue to undermine sentiment towards the housing sector and dollar. Any recovery in sales would provide important currency relief.
The Euro-zone PMI index dipped to 54.8 in July from 55.6 the previous month while the services-sector index held firm. There was also a 9.1% increase in industrial orders in the year to May, maintaining the recent mixed trend.
The May Euro-zone current account deficit widened to EUR8.3bn from EUR1.6bn the previous month which will raise some concerns over the competitive position, although the main deterioration was seen in the investment income account.
The Japanese currency secured renewed gains in Asian trading on Tuesday with gains to a high of 120.40 against the US currency as the break of 120.80 support triggered stop-loss dollar selling. The yen retained a firm tone in US trading as Wall Street remained on the defensive with a high close to the 120.10 level while the Japanese currency also strengthened through 166.50 against the Euro.
Concerns over global credit conditions will tend to support the Japanese currency given the relative lack of exposure of the Japanese financial sector and uncertainties over the economic performance elsewhere in the G7 area.
There is likely to be greater caution over carry trades with Japanese investors more cautious over aggressive capital outflows. Repatriation of funds back to Japan will be a significant threat if risk aversion increases which could trigger sharp yen gains.
Sterling pushed to highs of 2.0640 against the dollar on Tuesday before edging slightly lower in US trading while the UK currency also tested levels below 0.67 against the Euro.
The July CBI orders index dropped to -6 from +8 the previous monthly which was the lowest reading since January. The production and export components were also weaker while the prices index also moderated. Although the survey was still relatively confident, the data will increase speculation that the manufacturing sector is starting to suffer from reduced competitiveness.
Bank of England Deputy Governor Gieve expressed uncertainties over the economic outlook and also stated that gradual interest rate moves are better when there are uncertainties in the economy. He also expressed unease over the potential adverse developments in credit conditions which could spread to the UK. There are likely to be increased doubts as to whether interest rates will need to rise above the 6.0% level.
The Swiss currency was trapped at levels weaker than 1.6650 against the Euro for most of Tuesday and weakened to lows near 1.2075 against the dollar. The Swiss currency was able to regain ground later in US trading as Wall Street was subjected to renewed selling pressure with a move to 1.6630 against the Euro.
Short-term franc trend will remain correlated strongly with movements in global stock prices and the level of risk aversion. The Swiss currency will gain strong support if there is a further sharp deterioration in credit conditions.
The Australian dollar has continued to resist pressure for corrections weaker and pushed to fresh 18-year highs against the US currency in Asian trading on Tuesday. The currency peaked close to 0.8860 before weakening to 0.8815 later in US trading.
The consumer inflation report will be watched very closely in local trading on Wednesday as it will have an important impact on interest rate expectations.
A strong figure, especially for the underlying rate, would maintain pressure for a further increase in interest rates within the next few months while a low figure would be likely to trigger a sharp reduction in yield expectations and trigger a sharp Australian dollar correction.