by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to lows near 1.5550 in early Europe on Tuesday before stabilising around the 1.55 level following a failure to sustain an advance towards 1.5460 following the Euro-zone data.
The German ZEW weakened to -52.4 in June from -41.4 the previous month which was the lowest reading since 1993. The renewed deterioration will increase fears that the Euro-zone economy is under pressure, especially as the ZEW warned over worsening loan conditions.
The ECB comments were generally in line with recent remarks, although Bini-Smaghi stated that a 0.25% increase should be enough to bring inflation back to the 2.0% target level. Any evidence of policy divisions within the ECB or national governments would be a serious negative factor for the currency, although a firm bank stance is liable to prevail.
The US data failed to have a major impact on the market as it was generally close to expectations. Housing starts edged lower to a 17-year annual rate of 0.98mn in May from a revised 1.01mn rate the previous month while permits were little changed at 0.97mn. The data will reinforce expectations of a very slow recovery at best for the economy.
Headline producer prices rose 1.4% in May while there was a more subdued 0.2% core increase. Overall interest rate expectations were scaled back to some extent following media reports that the Federal Reserve would be more cautious over increasing interest rates than had been priced into futures markets over the past couple of weeks. Markets were still expecting an increase in rates to 2.50% before the end of 2008, but curbed more aggressive expectations.
The dollar retained a generally firm tone in Asian trading on Tuesday, but was unable to attack key support levels.
The Japanese tertiary or services index rose 1.8% in April to give a 0.6% annual increase. This failed to have a significant impact as markets are not expecting that the Bank of Japan will respond by pushing interest rates higher.
The yen was still being undermined by interest rate considerations with speculation over additional capital outflows into high-yield instruments, especially if overall risk appetite is higher. The Japanese currency also secured a limited correction against the Euro after a series of 2008 Euro highs.
Despite a brief rally following the Goldman Sachs results, the dollar drifted weaker later on Tuesday with a move to around 108.00 as Wall Street weakened on renewed losses in the financial sector.
Sterling remained firm ahead of the UK inflation data but, despite an initial advance, then weakened sharply.
The headline consumer inflation rate rose to 3.3% in May from 3.0% with the core rate at 1.5% from 1.4%. The RPI rate excluding mortgages also rose to 4.4% from 4.2%. The headline inflation rate is at a 16-year high which will reinforce unease over inflation trends.
The higher inflation rate forced the Bank of England Governor King to write an explanatory letter to the Treasury. King warned that inflation was likely to rise further over the next few months. He also warned that higher interest rates could trigger a slowdown severe enough to push inflation below target. These comments indicate that the bank will be reluctant to raise interest rates and this undermined Sterling, although the principal message was one of uncertainty.
The UK currency weakened to beyond 0.7950 against the Euro before a partial recovery while it also dipped to lows below 1.95 against the dollar before a move to 1.9560.
The dollar was blocked near 1.0460 against the franc on Tuesday and settled just above the 1.04 level. The Swiss currency found some support close to 1.62 against the Euro.
The latest industrial production data was weaker than expected with a 9.3% quarterly decline which will dampen speculation that the National Bank will push for higher interest rates, although the bank is likely to be more concerned with inflation and financial-market developments.
The franc will gain wider defensive support if there is a further deterioration in confidence surrounding the global economy.
The Australian dollar found support below the 0.94 level on Tuesday. The Reserve Bank minutes from June’s meeting reported that interest rates were high enough for the domestic economy and this dampened speculation that the bank would move to tighten monetary policy which will tend to lessen Australian currency support.
Commodity prices had a slightly firmer tone over the day while the Australian currency also gained some support from a weaker US currency. The Australian dollar edged stronger to test 0.9450 in US trading.