by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar secured a boost from Fed comments in Asian trading on Tuesday and, after finding support near 1.5650, the US currency retained a firmer tone against the Euro throughout the day.
Fed Chairman Bernanke stated that there was a reduced risk of a substantial downturn in the economy while he also warned that the Fed would strongly resist any erosion of inflation expectations.
Futures markets moved to price in at least two interest rate increases by the Fed before the end of 2008. The tough Fed stance and warning over the dollar’s level will provide some near-term currency support, especially with speculation over intervention. The dollar will, however, then be vulnerable in the event of any data which suggests that the economy is continuing to deteriorate.
The US trade deficit rose to US$60.9bn in April from a downwardly-revised US$56.5bn previously and this was a 13-month high for the deficit. Imports rebounded strongly from a sharp decline the previous month while there was a robust 3.3% increase in exports. The increase in trade will provide some degree of optimism over the economy and the immediate market impact should be limited.
There were no significant Euro-zone developments during the day with ECB officials maintaining a tough stance on inflation. The Russian authorities confirmed that the rouble was trading in a wider band and this will tend to diminish Russian Euro buying. The Euro weakened to lows around 1.5440 in New York before stabilising.
Yen
The Japanese currency remained on the defensive in Asian trading on Tuesday with the dollar pushing to a high of 106.80 as the US currency was boosted by a rise in yields following the tough rhetoric from Fed Chairman Bernanke.
Domestically, core machinery orders rose 5.5% on April to give 0.5% annual increase, but confidence in the economy is still generally fragile with expectations that growth will be weaker over the next few months.
The US currency retained a generally firm tone during the day with a further test of three-month highs above the 107.0 level against the Japanese currency. There was a peak close to 107.45 in New York as low-yield currencies were on the defensive.
Sterling
Sterling was unable to sustain a brief move through 0.79 against the Euro on Tuesday and weakened back towards 0.7940 before regaining ground in New York. Sterling dipped sharply to lows around 1.9515 against the US dollar.
The UK housing data remained weak with the RICS survey reporting that 92.9% of agents reporting lower prices in May from 95.1% the previous month while activity was at a 30-year low.
The latest BRC retail sales survey provided some relief with a 1.9% like-for-like rise in the year to May. Industrial production rose 0.2% in April with a 0.1% manufacturing increase which will not have a significant impact.
The interest rate trends will provide some Sterling support as bond yields remained higher, although the positive impact will continue to be substantially weakened by fears over a more severe economic downturn. Bank of England Governor King made no comments on monetary policy and markets will look at the unemployment data on Wednesday for further evidence on economic trends.
Swiss Franc
The dollar found support below 1.0280 against the franc on Tuesday and pushed to highs around 1.0430 in US trading. The franc was undermined by wider US currency gains while there was also some general erosion in currencies traditionally used to fund carry trades. The franc consolidated around 1.61 against the Euro.
There has been further US rhetoric in favour of a stronger US currency and this will tend to undermine the franc in the short term. Any sustained decline in commodity prices would tend to boost risk appetite which would also tend to undermine the Swiss currency, although market conditions will remain volatile.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian dollar struggled to regain any momentum following the sharp dip in US trading on Monday. The domestic data was mixed with an improvement in business confidence offset by a decline in home loans. The Australian dollar moves will continue to be driven to a strong extent by commodity prices while the currency was also unsettled to some extent by the sharp drop in Asian equities during Tuesday.
The Australian currency dipped to lows around 0.9440 against the US currency in New York as gold prices fell sharply and struggled to regain ground as commodity-currencies were generally weaker.
