by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The US currency gained further support from a liquidation of commodity price trends on Thursday. The dollar pushed to highs just beyond the 1.54 level before correcting weaker to around 1.5440 later in US trading.
The US economic data was mixed on Thursday, but still had a weak bias. Initial jobless claims increased to 378,000 in the latest week from a revised 356,000 previously which suggest that the labour market is deteriorating slightly further. The Philadelphia Fed index recovered to -17 in March from -24 previously and there was an important improvement in the six-month business outlook index. Despite the headline contraction this improvement will raise some expectations that the economy can recover later in 2008.
Overall confidence will, however, remain frail in the short term with further unease over both the financial sector and the economy as a whole. Without clearer evidence of a recovery, the dollar will find it difficult to sustain gains. Markets will still be on alert for possible intervention during the Easter period.
The Euro-zone PMI indices for the manufacturing and services sectors dipped to 52.0 and 51.7 respectively in March from 52.3 the previous month which will reinforce fears over a slowdown in the economy. The slowdown still appeared to broadly contained which will encourage the ECB to maintain a focus on inflation pressures.
The Japanese markets were closed for a holiday on Thursday which dampened activity and the dollar was holding just above the 99 level in early Europe as it looked to find a base. The US currency advanced further, but was unable to sustain a move above the 100 level and retreated to 99.0.
There were further political stresses surrounding the appointment of a new Bank of Japan governor, but this did not have a significant impact on the currency.
Underlying risk aversion is still at elevated levels which is supporting the Japanese currency and there is the potential for further capital repatriation flows over the next 10 days ahead of the Japanese fiscal year-end.
Sterling remained on the defensive against the dollar in early Europe on Thursday, but secured a corrective recovery against the Euro and there were broad gains following the UK data.
Retail sales rose 1.0% in February after a revised 1.1% increase the previous month for a 5.5% annual increase. Although discounting will have again been important, the data will improve near-term confidence in consumer spending, especially as sentiment had deteriorated sharply during the week. Expectations of an April rate cut will also be scaled back slightly.
The banking sector will remain a key short-term focus for UK markets and Sterling. The Bank of England promised to restore orderly conditions, but there was no promise of additional action beyond the additional liquidity supplied on Thursday. The absence of more dynamic support will be a small negative factor for Sterling.
The Swiss currency weakened to 1.57 against the Euro on Thursday, but held support close to this level and strengthened back to 1.56 in US trade. The Swiss franc also weakened sharply in European trading to lows near 1.0170 against the dollar before consolidating near 1.01 in New York.
Underlying confidence in the global financial sector remained very fragile even when stock markets attempted to rally and this continued to provide underlying support for the Swiss currency despite further debt write-downs by Credit-Suisse.
The Swiss trade account remained in comfortable surplus for February despite a strong increase in imports over the month while producer prices rose 0.2% in the month to give a 3.6% annual increase. Overall fundamentals will remain firm in the short term.
Commodity prices continued to weaken during Thursday which put downward pressure on the Australian currency, especially as risk aversion was still relatively high. The Australian dollar weakened to lows just below the 0.91 level against the US currency in local trading which was the lowest reading for a month.
The domestic influences will remain limited in the short tem with global market conditions still dominant. A further drop in gold prices pushed the Australian currency to lows below the 0.90 level in early US trading as currency positions were liquidated. Volatility levels will remain high in the short term.