by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to make fresh headway in Europe on Tuesday and weakened to fresh record lows near 1.55 following the German data.
In early US trading, the Federal Reserve announced that it would inject extra liquidity into the money markets and would also accept a wider range of instruments as collateral. In addition, enhanced swap arrangements were announced with other G7 central banks. The moves are designed to ease stresses in the credit markets and lessen the pressures which are further undermining the mortgage sector.
The measures triggered some speculation that the Fed would need to be less aggressive towards interest rate cuts and there was reduced speculation that there would be a 0.75% Fed Funds rate cut next week. The move helped eased immediate fears surrounding the US markets and this helped trigger a sharp dollar corrective recovery back to highs near 1.53 against the Euro.
The US trade deficit was little changed at US$58.2bn in January from a downwardly-revised US$57.9bn in December while the underlying deficit narrowed. The export gains will provide some dollar support, although the data release was overshadowed by the Federal Reserve move.
The German ZEW index recovered to -32.0 in March from -39.5 the previous month which will provide some relief over the economic outlook and provided initial Euro support. ECB member Weber also maintained a tough stance on inflation. Markets will still be on high alert over possible intervention if the dollar weakens back towards the 1.55 level.
There was solid dollar support close to the 101.50 level in Asian trading on Tuesday. The trend for a yen correction weaker was encouraged by a recovery in the Nikkei index on hopes for additional Federal Reserve action to support the financial sector. The dollar was still undermined by a narrowing in the two-year yield spreads against the yen to the lowest for over 14 years.
The Finance Ministry confined its remarks to one of watching the markets closely, but there will be greater reservations over dollar selling below the 102.0 level, especially after Trichet’s comments on the Euro during Monday. Parliamentary doubts over Bank of Japan Governor Muto will represent some risk to the yen.
The yen weakened sharply in US trading on Tuesday following the Fed’s move to boost liquidity as risk aversion eased, at least temporarily. The Japanese currency weakened to 103.40 which eased immediate speculation over a dollar decline to the 100 level.
Sterling weakened to lows near 0.7680 against the Euro on Tuesday before strengthening back to 0.7640 in New York trade. There was high volatility against the dollar with gains to highs to a high above 2.02 followed by a retreat to lows near 2.00 following the Fed move to boost liquidity. Risk aversion eased which encouraged a renewed flow of funds into the high-yield currencies such as Sterling.
The UK data overnight on Tuesday was weaker than expected with the RICS index of house price trends dropping to an 18-year low of -64.1% in February from -54.7% the previous month while the BRC reported that like-for-like retail sales growth dipped to 1.5% for February.
The data will reinforce economic fears and will limit Sterling support, especially as reported mortgage lending was also sharply lower over the year.
The Swiss franc tested levels around 1.0150 against the dollar and below 1.57 against the Euro in early Europe on Tuesday.
The franc was sold following the Fed move to boost liquidity and this pushed the currency to lows around 1.0350 against the dollar in New York trade. The franc also retreated to beyond 1.58 against the Euro.
The Swiss currency will lose ground if there is a sustained improvement in risk appetite and a durable recovery in stock markets, although overall volatility levels are liable to increase.
From lows around 0.9150, there was some Australian dollar support later in Asian trading as stock markets rallied and this pushed the Australian currency back towards the 0.92 level. The domestic data suggested some moderation in growth which had a small negative impact on the local currency.
The international risk environment will remain a key focus and the Fed moves to boost liquidity pushed the Australian dollar back to 0.9250 in New York. There will also be some support if there is a renewed flow of funds into commodities. Higher volatility is still liable to be the principal short-term feature given the market uncertainty.