by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to lows just beyond 1.59 against the Euro ahead of the ECBinterest ratedecision on Thursday. The central bank increased interest rates to 4.25% from 4.00%, in line with market expectations.
In the press conference following the interest rate decision, ECB Chairman Trichet maintained a tough approach on inflation with comments that the rate increase was designed to head off secondary inflation effects.
Trichet also, however, effectively stated thatbank was now in a neutral stance to await further developments while there were important downside risks to growth. These comments will reinforce expectations that the bank will not look to tighten policy further in the near term. The comments triggered some scaling back of expectations and the Euro weakened down to 1.5750 in an immediate reaction.
The monthly US payroll report was close to expectations with a decline of 62,000 while the May data was revised to show a 62,000 drop for the month, the six consecutive decline. The unemployment rate held at 5.5% following the sharp increase seen the previous month. The latest jobless claims data also recorded an increase to 404,000 in the latest week.
The non-manufacturing index was weaker with a decline to 48.2 in June from 51.7 the previous month as higher prices undermined confidence. The dollar initially weakened to 1.5770, but then rallied back to 1.57 on a spate of short covering ahead of the Independence Day holiday. Unease over the US economy will tend to limit dollar gains.
Sentiment towards both the yen and the dollar remain generally weak with unease over US fundamentals and a lack of yield support for the yen. There will be scope for underlying capital outflows from Japan in search of higher yields.
Overall confidence in the global economy will remain fragile which should provide some degree of yen protection, especially ifoil pricescontinue to strengthen as fears over the global growth outlook would intensify. The dollar was holding just above 106.0 in early Europe on Thursday.
The dollar proved resilient against the Japanese currency and pushed to highs around 106.90 as Wall Street looked to rally following the payroll data.
The UK PMI index for the services sector weakened to 47.1 in June from 49.8 the previous month which was the lowest reading for over five years. The Bank of England reported a further deterioration incredit conditions both in the household and corporate sectors with expectations of a further tightening in the third quarter. The data will maintain increased fears over the economy, especially as recent evidence has suggested a much increased risk of a sharp downturn.
In this environment, theBank of Englandwill be even more reluctant to tighten monetary policy to curb inflationary pressure and this will limit the scope for capital inflows. Increased unease over the European outlook will continue to provide some degree of protection to Sterling.
The UK currency weakened to lows of 0.80 against the Euro after the UK data, but regained ground following the ECB press conference. The UK also dipped to lows near 1.98 against the US dollar.
The franc fluctuated around the 1.61 level against the Euro on Thursday. The dollar found support close to 1.01 against the franc and strengthened sharply to a high of 1.0280 in New York trading.
Swiss consumer prices rose 0.2% in June with the annual increase at 2.9% from 3.2% previously which will offer some reassurance over underlying inflation trends and will tend to weaken the franc marginally. The immediate impact should be limited, especially as the National Bank warned against any substantial franc weakness or renewed rise in inflation.
The Australian currency was unable to push above the 0.9650 level against the US dollar on Thursday. The Australian trade deficit for May was little changed at around AUD1.0bn which will not have a significant impact. The PMI index for the services sector dipped sharply to 45.4 in June from 49.7 the previous month and the sharp decline will revive fears over the domestic economic trends.
Global influences will still tend to dominate in the short term and the currency will gain support ifcommodity pricescontinue to rise. Nevertheless, given global growth fears, there will be an increasing risk of a sharp correction weaker forcommodities which would also expose the Australian dollar to selling pressure.
The currency retreated to lows of 0.9580 in US trading before stabilisation around 0.96.