by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened in European trading on Wednesday, but resisted a decline through the 1.58 level and pushed to re-challenge key Euro support levels around 1.5610. The dollar temporarily broke through this resistance band before settling around 1.5620.
The US authorities are continuing with measures to boost market liquidity. The regulators have raised the capital limits on mortgage agencies Freddie Mac and Fannie Mae which will allow them to take additional mortgages on to their books and effectively increase liquidity in the sector as a whole. The sustained efforts to underpin market conditions should provide some degree of support to confidence, although underlying fears will certainly persist.
There were no significant US data releases on Wednesday, but the data will be watched closely on Thursday for further evidence on the near-term economic trends. The Philadelphia Fed survey will be particularly important given that the slump in this index over the past two months has been a key warning sign for the economy.
Overall confidence in the US economy remains very fragile with markets still pricing in further interest rate cuts over the next few meetings which will curb near-term dollar demand.
The Euro-zone trade account weakened to a headline deficit of EUR10.7bn for January from EUR4.1bn the previous month which will increase unease over the competitive position, although the immediate impact will be limited. IFO President Nerb called for the ECB to take action on interest rates and pressure for rate cuts will increase if there are weak PMI readings on Thursday.
The US currency was unable to hold above the 100 level against the yen in Asian trading on Wednesday as over-bought conditions on a very short-term view combined with increased speculative domestic dollar sales.
There has been no agreement over a new Bank of Japan Governor ahead of Fukui’s departure this week and the power vacuum will tend to unsettle the yen. Markets will still be on alert for co-ordinated intervention if the dollar slumps again as yen sales will be directed by the Finance Ministry.
Renewed financial-sector jitters pushed the dollar down to lows below 98.0 in European trading before a rebound with the US currency settling around the 99.0 level. Underlying risk aversion and fears over the global banking sector will still provide significant near-term support to the Japanese currency.
After rallying strong on Tuesday, rumours of serious difficulties at UK bank HBOS weakened Sterling again on Wednesday as underlying confidence continued to deteriorate. The UK currency dipped to lows near 2.00 against the dollar and 0.7870 against the Euro in early European trading.
The latest MPC minutes recorded a 7-2 vote for unchanged interest rates at the March meeting. Blanchflower and Gieve both voted for an immediate rate cut and the vote of Gieve is important given his responsibility for financial markets. The majority were still concerned over the inflation trends, but expected that interest rates would fall gradually.
The latest employment data also recorded a reduced decline in unemployment of 2,800 for the month which will reinforce expectations of weaker growth in the economy.
If financial stresses return quickly, there will also be further pressure on the central bank to sanction a near-term cut in rates. There will be increased speculation that the bank will cut rates in April and the UK currency weakened further in New York trade with lows around 1.9800 against the dollar.
The Swiss franc was weaker in Asian trading on Wednesday, but found support around 1.0050 against the US dollar and secured renewed buying interest during European and US trading.
Despite the strong rally in equity prices on Tuesday, underlying confidence remains very weak and this is providing further demand for the franc on safe-haven considerations. Wall Street weakened on Wednesday which supported the franc while the rumours of European banking-sector difficulties also underpinned the franc.
The Australian dollar pushed to highs just above the 0.9350 level against the US dollar on Wednesday. The immediate levels of risk aversion eased which provided support to the Australian currency with a tentative flow of funds into high-yield currencies. The domestic influences remained of secondary importance, but there will be speculation over a slowdown which will curb Australian dollar support.
The Australian dollar will benefit if market fears ease, but there will still be a considerable underlying caution. Commodity prices were important on Wednesday and a sharp drop in gold prices helped push the Australian currency weaker with lows below 0.9150 against the US dollar.