by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to lows around 1.5625 against the Euro on Tuesday, but then reversed direction in US trading.
Fed Chairman Bernanke stated that the central bank was attentive to the implications of dollar weakness while he was confident that the currency would remain strong and stable. The comments on the dollar are unusual and potentially very significant. There will be increased speculation that the Fed, US Treasury and global G7 officials are looking to prevent any further dollar losses, especially as the weak US currency has contributed to the strength in commodity prices. There will also be some speculation over market intervention if the dollar weakens again.
The US factory orders data was stronger than expected for the second successive month with a 1.1% increase for April compared with forecasts for no change. Bernanke also stated that interest rates were well positioned in remarks on Tuesday. The comments will reinforce expectations that the Fed will not want to cut interest rates again in the short term, although there was no suggestion of an increase. The employment data will be watched closely for further evidence on Wednesday.
There was no significant Euro-zone data over the day, but the retail sales data will be watched closely on Wednesday given the evidence of recent weakness. ECB President Trichet retained a firm stance on inflation and interest rates in comments on Tuesday and there will be expectations that the ECB will hold steady at the council meeting on Thursday. Tough rhetoric will provide some near-term Euro support.
Caution was still evident in Asian trading on Tuesday with speculation that Lehman Brothers will raise additional capital contributing to unease over the financial sector.
The dollar was holding just above the 104.0 level with evidence of buying support from individual Japanese investors helping to protect it from further selling pressure, but the US currency was struggling to make any significant headway.
The US currency advanced strongly following Bernanke’s comments, but gains were capped close to 105.50 and settled around 105.10 later in US trading as Wall Street was subjected to renewed selling pressure. Trading conditions are liable to remain volatile in the short term.
Sterling dipped to lows around 0.7940 against the Euro on Tuesday before recovering back to 0.7870 as the Euro retreated sharply against the dollar. The UK currency was unable to sustain a move above 1.97 against the US currency and settled near 1.9650.
The PMI index for the construction sector weakened to 43.9 in May from 46.1 the previous month which was a record low for the index. Further weakness will reinforce fears over a sharp downturn in the construction and housing sectors and this will also reinforce a lack of confidence in the economy.
The PMI index for the services sector will be watched very closely on Wednesday. Any dip to below the 50.0 level would further undermine confidence in the UK economy. A very weak reading would also would revive speculation that the Bank of England could sanction an interest rate cut this week which would damage Sterling.
The Swiss currency remained strong in early European trading on Tuesday with a push to highs around 1.0275 against the dollar and 1.6050 against the Euro.
Domestically, a 15-year Swiss inflation rate of 2.9% for May supported the currency with expectations that the National Bank will not be in a position to consider a cut in interest rates within the next few months.
Markets reversed course sharply in US trading with the franc retreating to 1.0480 against the dollar. The Swiss currency was undermined by Bernanke’s comments on the dollar and a recovery in risk appetite, but it moved back to 1.04 later in New York. The Euro consolidated around the 1.61 level against the Swiss currency.
The Australian dollar held steady in Asian trading on Tuesday and tested levels above 0.96 as the US dollar came under pressure.
The domestic data provided some support as there was an increase in building approvals and a slightly narrower than expected first-quarter current account deficit, although the shortfall was still close to the AUD20bn level. As expected, the Reserve Bank of Australia left interest rates on hold at 7.25%. The bank stated that demand should moderate and this will dampen expectations that the central bank will push for higher interest rates.
Global trends dominated later on Tuesday and the Australian currency retreated to 0.9510 as the US currency rallied.