by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened to 1.3420 against the Euro in early Europe on Wednesday, but failed to sustain any momentum and weakened back to 1.3445 in US trading as narrow ranges dominated again.
US durable goods orders fell by a larger than expected 2.8% in May and there was a 1.0% underlying decline, but the April data was revised higher which will cushion immediate concerns over the industrial sector.
The FOMC policy decision and statement will be watched closely on Thursday and there is a very strong probability that the Fed will leave interest rates on hold at 5.25%. The statement should also be similar to the decision last time and the dollar should be able to resist heavy selling pressure given that markets have already swung back towards expecting an interest rate cut late in 2007. The dollar will need clear warnings of higher interest rates from the Fed to secure significant buying support.
Euro-zone government bond yields fell during Wednesday with 10-year yields dipping towards a June low of 4.55% and this drop in yields will offer some dollar protection even though there was a decline in US yields as well. The German unemployment data will be watched closely on Thursday after a surprise increase last month and another increase for this month would unsettle the Euro.
The yen secured renewed gains in Asian trading on Wednesday and strengthened to highs around 122.30 against the dollar before a partial retreat later in US trading. The Japanese currency also strengthened to highs near 164.20 against the Euro. The yen gained some support from expectations that the Japanese authorities were looking to curb currency weakness following the replacement of top finance official Watanabe.
The Japanese retail sales data was firmer than expected with a 0.1% increase in the year to May. The immediate impact should be limited, but the yen will be in a better position to gain ground if there is strong industrial production data on Thursday.
Carry trades will still tend to dominate in the short term. The Japanese currency gained some renewed support from the weaker trend in global stock markets which curbed enthusiasm for carry trades as risk aversion levels rose. Any further shift of funds into defensive assets would support the yen and any general contraction of global liquidity would also provide very strong support for the Japanese currency.
Sterling dipped to lows around 1.9930 against the dollar on Wednesday, but pushed back to 1.9980 in US trading. Although there was a general retreat for high-yield currencies, Sterling held firm as markets continued to look for higher UK interest rates.
There was an increase in mortgage approvals for May according to the latest BBA report, although much of the increase was seasonal and there was still a decline over the year. There was also evidence of re-mortgaging activity as the banks increased market share. The wider mortgage data will, therefore, be watched closely on Friday.
The CBI retail survey was weaker for June as bad weather conditions stifled consumer demand. The Bank of England looks to be on track for a July interest rate increase.
Nevertheless, the overall evidence still suggests that rate expectations beyond July are liable to be downgraded over the next few weeks which will curb Sterling support.
The Swiss currency tested levels beyond 1.65 against the Euro on Wednesday, but was unable to hold the gains and settled just weaker than this level. The franc held firmer than 1.23 against the dollar.
The Swiss KOF index edged stronger to 1.98 in June from a downwardly-revised 1.94 in May. The data continued to indicate solid growth, although there will be some disappointment that the index did not move above the 2.00 level.
The Swiss currency will continue to gain some support from a switch into more defensive assets, especially if there is a rapid unwinding of carry trades and further stresses in global stock markets.
The Australian dollar correction weaker gathered pace in local trading on Wednesday with a move to lows around 0.8410. There were no significant domestic releases with global trends tending to dominate.
The currency was undermined by a drop in commodity prices and the weaker trend for global stock markets which reduced investor demand for the Australian dollar. The currency will be vulnerable to further selling pressure if there is a sustained increase in risk aversion and a move away from high-yield instruments. In this context, the Australian currency weakened to lows around 0.8360 in US trading.