by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar edged lower following the weekend G8 meetings and, after renewed gains to the 1.5350 area, the US currency weakened sharply in European trading with a low near 1.5520. The dollar was unsettled by a sharp rise in oil prices to record highs, although crude did retreat from its best levels later in US trading which helped the US currency rebound from lows.
There was some disappointment that Finance Ministers did not make a more robust call for a stronger dollar at the meetings, although there were references to the need to combat inflation and there will still be incentives to secure further dollar gains.
The New York manufacturing index fell to -8.7 in June from -3.2 the previous month. The decline raised some renewed fears over the US economic conditions which curbed any further increase in yields.
The capital account data was stronger with net long-term inflows of US$115.1bn for April after revised inflows of US$60.6bn the previous month. Although the data is for April, there should be some optimism over the US ability to attract capital on valuation grounds.
The headline May Euro-zone inflation rate rose to 3.7% from a provisional 3.6% estimate, but the increase in core inflation was held to 1.7% from 1.6% which will provide some degree of relief that underlying inflation pressure can be contained.
Markets will still be expecting a July interest rate increase from the ECB which should underpin the Euro. The German ZEW data will be watched closely on Tuesday and renewed deterioration would increase fears that the Euro-zone economy is deteriorating. Any evidence of policy divisions would also unsettle the currency.
The Japanese yen remained generally weak on Monday as investors continued to push funds into higher-yielding instruments.
French Finance Minister Lagarde stated that she would prefer the yen to strengthen against the Euro and this may provide some slight degree of support to the Japanese currency, although a substantial impact is unlikely without stronger rhetoric.
The lack of a more decisive promotion of a stronger US currency at the G8 was over-shadowed by the underlying shift in US interest rate expectations and the flow of funds into higher-yield currencies.
The US currency was able to hold above 108.0 in early Europe on Monday as technical levels continued to be probed and pushed to a high of 108.60 before a retreat. The yen remained on the defensive against the Euro at 2008 lows.
Sterling found support below 1.9480 against the dollar on Monday and strengthened to a high of 1.9690 in European trading. The UK currency was firm against the Euro, but again encountered selling pressure beyond the 0.7880 level.
The latest Bank of England quarterly bulletin warned that higher inflation may persist in the medium term and the UK currency was slightly stronger on Monday on yield considerations.
The latest consumer inflation data will be watched very closely on Tuesday and a further sharp increase would increase pressure for the central bank to respond with higher interest rates.
If the headline inflation rate is above the 3.0% level, as appears highly likely, then the Bank of England will have to issue an explanatory letter to the UK Treasury. Sterling would gain some support if the bank suggests a tough approach on policy in the letter, although King will not want to commit the bank to a certain course of action.
The franc was unable to push through 1.61 against the Euro on Monday and dipped to lows near 1.6190 which was the lowest level during June. The dollar hit tough resistance above 1.05 against the dollar and retreated to test levels below 1.04 before recovering.
The Swiss currency was unsettled by fresh demand for high-yield currencies during the day as risk appetite showed some degree of recovery.
Although there was some speculation that the National Bank would look to tighten monetary policy this week following a move to push money-market rates higher, this failed to have a positive impact on the franc.
Source: VantagePoint Intermarket Analysis Software
The Australian currency edged above the 0.94 level against the US dollar on Monday, but was unable to sustain the gains. Commodity prices are hitting selling pressure on rallies which is hampering the Australian currency while overall US sentiment is also still firm despite the retreat on Monday.
The Australian dollar will continue to gain some support on yield considerations, especially if the Reserve Bank takes a tough stance on interest rates in the minutes which are due to be released on Tuesday. The Australian currency held firm in US trading, but was still struggling to sustain gains above the 0.94 level.