by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar remained under heavy pressure against the Euro in Asian and early European trading on Thursday and weakened to lows around 1.5625 before securing a limited correction. High oil prices remained a significant negative background influence for the currency while sentiment remained depressed and there was renewed selling late in US trading.
Headline US retail sales fell 0.6% in February while there was a 0.2% decline in core sales, although the impact was lessened to some extent by an upward revision to January’s data. Initial jobless claims were little changed at 353,000 in the latest week while there was a further small increase in existing claims.
Overall confidence in the US economy remained very fragile with persistent fears over a deepening recession, especially after the weak retail data. Markets have also swung back towards expecting a 0.75% interest rate cut at next week’s Fed meeting. There was some evidence of stresses within emerging markets on Thursday which should provide some measure of dollar support and a substantial amount of bad news has been discounted.
There were further comments from European officials on the Euro during Thursday. ECB president Trichet stated that disorderly currency moves were unwelcome while he also stated that he was pre-occupied with excessive currency moves. The remarks will increase speculation that the authorities are close to intervening, but there was no sign of an imminent move. There was also no major alarm with Constancio stating that there was no exchange rate target.
The themes of sharp dollar and equity-market losses continued throughout the Asian session on Thursday. In early Europe, the yen pushed to a high just beyond the 100 level for the first time in over 12 years as aggressive stop-loss dollar selling also helped push the yen stronger. The Nikkei index weakened to a new 30-month low which provided additional defensive support for the Japanese currency.
Markets will be on high alert over protests against yen strength by Japanese officials. Finance Minister Nukaga stated that excessive currency moves were bad for growth and the rhetoric was slightly more robust. At this stage, the comments have not been strong enough to suggest that the authorities are considering intervention, but there will still be major caution over yen buying below the 100 level against the dollar.
The dollar rallied back above the 101.0 level in US trading as Wall Street recovered from opening lows.
Sterling continued to advance against the dollar in early Europe on Thursday and pushed to highs near 2.04 before dipping back to below 2.03 in US trading. The UK currency was unable to sustain gains beyond 0.7650 against the Euro and weakened back to near record lows around 0.7690.
Sterling should be susceptible to selling pressure when risk aversion rises and recover when fears ease, but the pattern against the Euro was the reverse of what might be expected over the past 24 hours which will maintain the threat of erratic trading.
The latest Bank of England survey recorded an increase in expected inflation to 3.3% from 3.0% previously which was the highest rate since 1999. The data will tend to reinforce near-term central bank opposition to a further near-term cut in interest rates.
The Swiss franc strengthened to highs around 1.0040 against the US dollar on Thursday and also pushed to highs beyond 1.57 against the Euro.
The currency moves were again influenced strongly by levels of risk aversion with the franc losing initial gains once Wall Street attempted to rally from opening losses.
The National Bank left interest rates at 2.75% following the latest quarterly council meeting. The bank lowered the GDP growth forecasts for 2008 slightly while the inflation forecast was increased to 2.0% from 1.7% previously. The higher inflation forecast will reinforce expectations that the bank will be reluctant to sanction an interest rate cut unless there is a major deterioration in conditions.
The domestic data provided strong support to the local currency with an employment increase of 36,700 for February while the unemployment rate fell to a new low of 4.0% from 4.1%. Following the data, the Australian dollar pushed to above the 0.94 level against the US dollar, but was unable to sustain the gains and weakened back to 0.9330 in early Europe.
The Australian dollar will tend to remain under pressure when risk aversion rises, especially as there are increased fears over the Chinese economic outlook. The currency rallied in US trading as there was a rebound in equity prices with gains to around 0.9450 in New York.