by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was little changed on Friday as trading volumes were curbed by the US holiday, but the US currency advanced in Europe on Monday with highs near 1.5610. The dollar was unable to sustain the gains and dipped to lows around 1.5750 in New York as risk aversion increased following a sharp reversal in US stockindices.
Markets will continue to monitor US economic trends closely over the forthcoming week. There is little in the way of major data releases, but indicators will still be watched closely given uncertainty over economic direction. Comments from Fed officials will be watched very closely with Fed Chairman Bernanke due to speak on Tuesday and testify to Congress on Thursday. The remarks from the Fed chief will be very important forinterest rateexpectations which could also have a powerful dollar impact.
The European data was weaker than expected with a 2.4% decline in German factory orders for the latest month. The Euro-zone Sentix indicator also dipped to -9.2 in June which was the lowest for over 2 years which will maintain unease over economic trends.
Overall fears over the economy are liable to increase in the short term which will tend to stifle Euro support as there is a persistent risk of significant capital outflows from the region.
Cruseoil pricesremained near record levels on Friday and there will be strong international pressure for action to cut prices. In this context, the G8 comments on exchange rateswill need to be monitored very closely as a stronger US currency would be an important element in helping to ease upward pressure on oil prices.
In comments on Monday, Bank of Japan Governor Shirakawa continued to warn over downside risks to the economy which maintained a generally negative stance towards the Japanese economy and currency.
Asianstock marketsalso regained some ground on Monday which boosted immediate confidence in carry trades and put some downward pressure on the yen with the US currency pushing to 107.30 in early Europe.
The US currency extended gains to 107.75 as US equity markets strengthened, but then weakened back to 106.90 as equity markets came under fresh selling pressure in choppy trading.
The UK currency will gain some degree of support if there is a recovery in risk appetite and Sterling edged stronger against the Euro in early European trading on Monday.
Industrial production fell 0.8% in April which will reinforce negative sentiment, although trends in the consumer, housing and banking sectors will tend to dominate underlying currency trends. In this context, rumours of further financial-sector difficulties unsettled the currency. Sterling weakened to lows below 1.97 against the dollar after the industrial data.
Interest rates will inevitably be an important focus ahead of theBankof EnglandMPC monthly rate announcement on Thursday. Any hints from the bank will be watched very closely over the next 48 hours as the bank will be very wary of announcing a surprise decision as this would tend to destabilise markets, especially if the bank was considering a rate increase to curb inflation.
In this context, there are liable to be hints over the bank’s decision. The UK currency recovered back to 1.9775 against the dollar as the US currency stumbled.
The dollar found pushed to highs around 1.0340 against the franc on Monday as the US currency secured a wider rally. The franc was generally weaker against the Euro with highs around 1.6160 in early US trading.
Seasonally-adjusted Swiss unemployment was unchanged at 2.5% for June which will not have a significant impact.
Risk appetite dipped sharply later in US trading and the franc strengthened back to highs near 1.0235 against the dollar in choppy trading while the currency also regained some ground against the Euro.
TheAustralian dollarwas weaker in local trading on Monday and dipped below the 0.96 level against the US dollar. The domestic data remained generally weak with the construction PMI index remaining well below the 50.0 level according to the latest survey while there was also a decline in reported job adverts which reinforced expectations that the economy was facing an important slowdown. Fears over a slowdown will tend to unsettle the Australian dollar.
The Australian currency will also tend to be sold if there is a sustained retreat incommodity pricesand there was a further retreat to lows below 0.9520 before a recovery to 0.9550 later in US trading.