by Darrell Jobman, Editor-in-Chief


The dollar weakened to lows near 1.3660 against the Euro in early Europe on Thursday before stabilising ahead of the key economic events. The dollar pushed to highs near 1.3580 after the US ISM release and settled close to 1.3600 in choppy trading.

The US ISM index for the services sector rose to 60.7 in June from 59.7 the previous month, the strongest reading sine April 2006. The underlying components were also generally robust over the month which will reinforce optimism over near-term US growth trends after a strong manufacturing reading earlier this week.

The other US data was also generally favourable with the ADP employment increase reported at 150,000 for June while reported layoffs also fell over the month. The ADP data will increase optimism over a solid payroll increase for June in this Friday’s data, although the dollar will now be more vulnerable in the event of a weak figure.

As expected, the ECB left interest rates on hold at 4.0% following the latest council meeting. In the press conference following the decision, ECB President Trichet stated that the bank would continue to closely monitor price risks while the medium-term risks to inflation were still on the upside. Trichet stated that he did not want to alter market expectations and the remarks as a whole continued to suggest that the bank would look to increase interest rates again in September.

There was no indication of greater urgency, especially with no plans to change plans for a tele-conference in August and the Euro has priced in a further tightening which will limit any Euro benefit.

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The yen weakened to fresh record lows against the Euro on Thursday before securing some limited respite while the Japanese currency was unable to hold gains through 122.50 against the dollar.

Global equity markets have held firm over the past two days while immediate credit fears have eased slightly. The short-term improvements in risk tolerances will tend to reduce yen demand. Complacency over global risk will remain an important threat over the next few weeks with the potential for a sharp drop in risk tolerances.

There are further investment trust funds due to be launched over the next two weeks and the flow of funds into overseas assets will tend to weaken the yen. Japanese officials will still tend to discourage aggressive yen selling. The latest capital account data also recorded another small net surplus in the latest weekly data which does not suggest that substantial yen losses are justified.


Sterling pushed to highs around 2.02 against the dollar following the Bank of England interest rate decision, but the UK currency was unable to hold the gains and weakened back to near 2.01. Sterling settled close to 0.6760 against the Euro from lows around 0.6780.

The Bank of England increased interest rates by 0.25% to 5.75% following the latest meeting, the fifth increase in rates since August 2006, and rates are now at a 10-year high.

The statement from the bank indicated that inflation risks were still to the upside and the bank is likely to maintain a tightening policy bias.

The economy has already shown some signs of a slowdown and the further increase in rates is likely to intensify any slowdown, especially as there will be greater stresses within the housing sector.

Evidence of a significant slowdown in the housing sector could quickly reverse interest rate expectations and put substantial downward pressure on Sterling.

Swiss franc

The Swiss franc pushed to highs around 1.21 against the dollar on Thursday before weakening back to lows near 1.22 and settling around 1.2165. The Swiss currency fluctuated around the 1.6550 level against the Euro.

Immediate fears over a global credit crunch have eased slightly which will reduce defensive franc demand, although the underlying stresses are liable to continue as credit lines are pared back.

ECB President Trichet again warned markets not to ignore two-way risk. The Swiss currency is still in a position to secure increased demand over the next few weeks as there is likely to be a more defensive market stance.

Australian dollar

The Australian dollar challenged the 0.86 level against the US currency in European trade on Thursday before weakening back to near 0.8560 in US trade.

As expected, the Reserve Bank of Australia left interest rates on hold at 6.25% following the latest council meeting on Wednesday. Expectations of a rate increase later in 2007 will continue to provide short-term currency protection, especially given the strong global focus on yields. The general flow of funds into high-yield currencies will provide short-term Australian dollar support, although overall volatility levels are liable to increase.

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