by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened in early Europe on Thursday, but was unable to sustain the move through 1.5630 and weakened sharply to lows around 1.5750 in early New York. The US currency gained some brief support from expectations of a wider Russian Rouble trading band which should dampen Euro demand.
This influence was more than offset by renewed fears over commodity and asset prices together with US fears. Oil pushed to fresh record highs over the day while gold also rose very sharply which helped undermine confidence in the US currency.
The US economic data again failed to have a significant impact as initial jobless claims were unchanged at 384,000 in the latest week. The previous figure was revised up slightly while there was a further increase in continuing claims which continued to suggest some gradual deterioration in conditions.
Existing home sales rose slightly to an annual rate of 4.99mn in May from 4.89mn the previous month. There was a small decline in inventories while prices declined over the year. Overall, markets continued to downgrade interest rate expectations slightly with the chances of an August rate increase cut to below 25%.
The latest Euro-zone data recorded a strong increase in import prices for May while the provisional German inflation data continued to record elevated annual readings. The ECB is maintaining a tough stance on inflation, although the economic fears are liable to increase which will be damaging in the medium term and severe downward pressure on stock markets could rule out a rate increase.
The US currency was unable to sustain levels above 108.0 against the Japanese currency during Asian trading on Thursday.
Bank of Japan member Nakamura suggested that no change in interest rates was likely in the near term while the global economic risks had increased. The raft of Japanese data due on Friday is unlikely to have a significant impact on central bank policy.
The latest Japanese capital account report showed significant net outflows from Japan which will tend to reinforce a lack of confidence in the yen. The currency will still gain some support if there is a sustained increase in risk aversion.
These risks were illustrated by solid yen gains in US trading as Wall Street was subjected to sharp downward pressure. The yen strengthened to highs around 106.60 against the dollar and also secured some respite against the Euro.
The UK currency found support on a dip towards 1.97 against the dollar on Thursday and pushed to highs near 1.99 as technical levels were broken. The UK currency was also generally resilient against the Euro, although it drifted weaker in US trading. Financial-market stresses will tend to limit the scope for UK currency support.
In testimony to the Treasury, MPC members repeated their concerns over the inflation and growth outlook in the economy. Bank of England Governor King stated that inflation was liable to move to above the 4.0% level this year under the influence of rising food and energy costs.
King also denied that he took a dovish stance in the inflation letter last week. Members again stated that the economy was slowing and would need to slow further to bring inflation back to the target level with wage trends crucial. There had been some discussion over higher interest rates and speculation that the bank will have to tighten policy will provide some Sterling support.
The dollar was unable to regain the 1.04 level on Thursday and weakened to lows near 1.0220 in US trading. The Swiss currency also gained some significant support against the Euro with gains to 1.6110 in New York as global equity markets weakened sharply.
Risk conditions will still need to be watched closely as a further escalation in credit fears could trigger further substantial franc buying support.
The KOF index will be watched closely on Friday and a further substantial dip in the index would reinforce fears over the Swiss economy which would unsettle the franc.
The absence of an aggressive Fed tightening pledge will reinforce the Australian dollar’s yield appeal and it continued to challenge the 0.96 level against the US dollar in local trading on Thursday. Credit risks have tended to increase, however, which will pose some risks to the Australian dollar, especially if there is any sharp reversal in carry trades.
Wall Street dipped sharply on Thursday and this pushed the Australian dollar back towards 0.9550 even though the US currency was generally weak.