by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar again found support close to the 1.5750 region against the Euro on Tuesday and strengthened to highs around 1.5640 in US trading.
US pending home sales fell 4.7% in May after a revised 7.1% increase the previous month. The decline will reinforce expectations that a significant near-term housing recovery is unlikely, but should not have a major market impact.
Fed Chairman Bernanke suggested that the Fed could extend US banks’ access to the discount window beyond the end of 2008 while the facility could also be broadened. This provided some degree of support to thebanking sector with greater confidence that the Fed would take measures to underpin liquidity and reduced fear over a further deterioration in conditions. This improved sentiment on Wall Street which also helped underpin the dollar as risk appetite recovered.
The dollar also drew support from a sharp decline in oil prices towards US$135 per barrel during the day, although the impact was less than seen over the previous few weeks.
There were no significant European data releases, but confidence in the Euro-zone data remains generally weaker which is unsettling the Euro with fears over capital outflows. A sustained decline in energy prices would also make it much less likely that the ECB would consider another increase in interest rates.
G8 members so far have concentrated on their preference for the Chinese yuan to strengthen, notably against the Euro. The lack of strong rhetoric in favour of the dollar will tend to cub near-term dollar support.
Japanese banklending data recorded a 2.0% increase in the year to June which was the strongest figure for two years. Although still low in historic terms, the data will provide some reassurance that Japan will be less vulnerable to the globalcredit crunch and should provide some degree of yen support given the international risks.
The yen also gained some support from wider risk aversion asstock marketsweakened in Asia on Tuesday. There was some retreat from carry trades and, although the US currency was initially still holding close to the 107.0 level against the yen, the dollar retreated to 106.40 in Europe.
There was still interest in selling the yen on rallies with a strong demand for overseas assets to boost returns, especially with summer bonus payments an important factor The US dollar pushed back above the 107.0 level in US trading as Wall Street regained ground.
The UK currency was trapped in relatively narrow ranges against the Euro on Tuesday with some support on retreats to weaker than 0.7960. Sterling was unable to push through the 1.98 level against the dollar and weakened to lows around 1.9665 as the US currency rallied.
Confidence in the economy remained weak with sentiment undermined by a weak quarterly survey from the British Chambers of Commerce. The survey suggested output had contracted during the second quarter and that the recession risk had therefore increased sharply.
The ThursdayBank of Englandinterest rate decision will be the key event of the week and any hints from bank officials over the next 24 hours will be watched very closely.
Sharp declines in Asian stock markets provided some franc support on Tuesday and the US dollar retreated to 1.0225 with the Swiss currency also gaining some ground against the Euro as it moved to levels stronger than 1.61.
Underlying unease over the Swiss economy is likely to limit franc gains with the banking sector a key focus given underlying stresses within UBS.
Risk appetite improved in US trading and this pushed the dollar back to 1.0340 while the Swiss currency also lost ground against the Euro with a move to 1.6180.
The Australian dollar remained under some pressure in local trading on Tuesday. The domestic data offered no support to the currency with business confidence falling to 0 from 7 the previous month which was thelowestratefor 7 years.
The Australian dollar continued to be unsettled by the dip in risk appetite and weakened to lows near 0.95 before a slight recovery in early Europe.
Commodity prices dipped sharply in US trading, but the Australian currency was able to resist further losses with evidence of renewed capital inflows from Japan.