by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar remained under pressure in European trading ahead of the US employment data on Friday and settled just weaker than the 1.54 level.
US non-farm employment fell by a further 63,000 in February after a downwardly-revised 22,000 decline for January. This was the weakest figure for close to five years and there were further falls in manufacturing and construction employment. Most sectors were weak which suggests a downturn in the economy as a whole and this will maintain weak sentiment.
There was a decline in the unemployment rate to 4.8% from 5.0%. The drop, however, reflected a sharp drop in the workforce as discouraged workers gave up looking for jobs while recorded employment fell. The 0.3% increase in earnings will not have a significant market impact.
The data will reinforce recession fears in the US economy and maintain pressure for further Fed support measures. Fed Governor Fisher warned the markets not to expect Fed action before the next scheduled meeting and he also stated that recent Fed policy would not continue. The Fed did, however, announce that the auctions to boost market liquidity would be increased to help ease money-market tensions. This may curb immediate pressure for lower interest rates, but markets continued to price in a 0.75% Fed Funds rate cut in March.
The dollar weakened further immediately after the US employment data, but there was aggressive position of adjustment in New York with a Euro decline to lows around 1.5320.
The German industrial data was stronger than expected with a 6.9% annual production increase, but this did not have a significant impact. There were again no significant protests against Euro strength by ECB officials.
The dollar held close to 102.50 support for much of Asian trading as there was caution ahead of the US data.
As expected, the Bank of Japan left interest rates on hold at 0.50% following the latest policy meeting. The government has pushed ahead to nominate Muto as the next Bank of Japan governor which may trigger some friction with parliament.
The Finance Minister warned that the forex market was being monitored very closely and there will be reservations over dollar selling given the threat of verbal intervention. A decisive move to intervene still looks unlikely at this stage given that the yen is still relatively weak on a trade-weighted basis.
Increased risk aversion strengthened the yen to below 102.0 in Europe and there was spike lower to 101.40 after the US payroll data before a recovery to 102.60. Credit fears will continue to provide background support.
Sterling has remained strong over the past 24 hours with gains to highs near 0.76 against the Euro. The UK currency also pushed to new 2008 highs just above 2.02 against the dollar before correcting back to 2.0140 in choppy US trading.
There were no significant domestic developments with international risk conditions dominant.
Underlying credit-related stresses will continue to be a significant risk factor for the UK currency as there will be important fears over the financial sector. In contrast, there is likely to be slightly greater short-term confidence over the domestic economy. The production and producer prices data will be monitored closely on Monday for further evidence on domestic trends.
Swiss franc strengthened to fresh record highs around 1.0130 against the US dollar following the US employment data. The franc was heavily over-bought after rapid gains over the past week and retreated to 1.0280 in volatile trading. The franc also tested levels beyond 1.57 against the Euro before a correction.
Levels of risk aversion remained dominant and the Swiss franc continued to draw support from elevated stress levels. The iTraxx crossover index of European bond insurance increased to a record high in early European trading which supported the franc.
Conditions stabilised to some extent in US trading as Wall Street resisted heavy early selling pressure and this curbed franc buying support.
The Australian dollar found support around the 0.9250 level and pushed back to above 0.93 in local trading on Friday. Conditions in global markets will tend to dominate in the short term and underlying credit fears will curb short-term Australian dollar support, especially with fears of liquidity contraction.
The levels of commodity prices will remain important and will provide some degree of currency support. A key feature is likely to be a sustained increase in volatility and the Australian dollar retreated to 0.93 from levels around 0.9370.