by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support weaker than 1.54 against the Euro on Monday and strengthened to test levels around 1.5315, but failed to extend the gains and consolidated around 1.5350.
There were no significant data releases and overall confidence in the dollar remained weak with further strong expectations of an aggressive interest rate cut this month. There was also further speculation that the Fed would sanction an emergency rate cut ahead of next week’s planned meeting.
ECB President Trichet stated that he was concerned over excessive exchange rate volatility and he also stated that he noted with extreme attention that the US favours a strong dollar policy. In addition, EU commissioner Almunia stated that the strong Euro does not reflect fundamentals.
The comments represent a slightly more aggressive stance by European officials and will create some speculation that there will be intervention to restrain the Euro. If the US authorities decide that a stronger dollar would make it easier to sanction a large interest rate cut, then they may be more willing to support the US currency.
The Euro-zone data on Monday offered some relief with the German trade surplus rising while Italian industrial output rose for the first time in four months. In contrast, the Sentix confidence index weakened and sentiment will falter if there is a weak German ZEW reading on Tuesday. There will also be serious underlying concerns over the Italian and Spanish economies which are liable to curb Euro support.
The Japanese currency strengthened back to 102.0 in Asian trading on Monday due to the underlying credit-related fears, but there was some dollar support from importer demand.
The latest speculative positioning data also recorded the higher net long yen position for four years which illustrates the shift in sentiment, although it will also expose the currency to potential profit taking.
The latest Japanese machinery orders data recorded a strong 19.6% increase for January which will provide some relief over the domestic economy, although the data series is very volatile. Yen moves were still strongly correlated with stock market moves and the yen probed levels towards 101.50 in US trading as Wall Street stumbled.
The Japanese stance on yen gains will be very important if the currency approaches the 100 level. If there are no retraining comments, this will increase the risk that the yen pushes rapidly through this level.
Sterling temporarily strengthened through the 0.76 level against the Euro on Monday before retreating to 0.7635. The UK currency also failed to hold levels above 2.02 against the dollar with a correction back to 2.01.
Input producer prices rose 1.7% in February, maintaining strong upward pressure with a 19.6% annual increase. The increase in output prices was held to 0.3% and core increases were under control. Industrial production fell 0.1% in January, but manufacturing output rose 0.4% over the month.
The core inflation data will provide some relief to the Bank of England as it suggests that raw-material price rises are not being passed on aggressively, but the central bank will still be uneasy over inflation trends.
The latest housing and consumer spending survey evidence will be watched closely overnight for further evidence on trends and weak readings for both would undermine Sterling confidence.
Degrees of risk aversion continued to dominate franc moves and the underlying credit-related fears triggered a further net inflow of funds into the franc.
Official comments will be watched closely if the Swiss currency continues to strengthen. Intervention is likely only in the context of wider G7 intervention to support the dollar, although some verbal opposition to curb franc gains is realistic.
The Australian dollar weakened to lows around 0.9250 in local trading on Monday. The currency will be vulnerable to selling pressure on widening credit-related stresses as there will be a shift into defensive assets with Australian selling against the yen.
The domestic money-market stresses will also tend to undermine the currency to some extent. The Australian dollar will still gain some support from high interest rate differentials and the recent strength of commodity prices.
Nevertheless, the dip in industrial metals prices helped push the Australian dollar to lows below 0.92 against the US dollar during Monday.