by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to 1.5640 against the Euro in early Europe on Thursday and then strengthened sharply over the remainder of the day with liquidity reduced by European holidays. The dollar broke Euro support levels near 1.55 and pushed to highs beyond 1.5430 after the US data releases. There was a further unwinding of short dollar positions and long commodity positions and these trends tended to reinforce each other over the day.
The US PMI data continued the trend for major data releases over the past few days as it was weak, but slightly stronger than expected and did not provide any strong indication of recession. The index for the manufacturing sector was unchanged in April at 48.6 and compared with expectations of a small monthly decline.
Elsewhere, jobless claims increased to 380,000 in the latest week from a revised 345,000 the previous week which will maintain some concerns over the labour market ahead of the key employment report on Friday. The core PCE inflation index rose by a stronger than expected 0.2% for March with a 2.1% annual increase which will maintain inflation fears, especially as there was a very strong reading for prices in the PMI index.
There were no significant Euro-zone developments during the day as markets wee closed for the Labour Day holiday. There will still be fears over a deteriorating economic outlook which will tend to unsettle the Euro. Near-term dollar direction will still tend to be determined by the Friday employment report and a very weak release would revive major economic fears. In contrast, any increase in employment would provide a big boost to dollar sentiment.
Trading conditions were subdued in Asia with many markets closed for the Labour Day holiday. Although Japan was open, institutional flows were limited with a series of holidays next week. There was also still caution over the forthcoming US data releases, notably the monthly employment report on Friday.
Fear remained at a lower level in global markets and this limited scope for yen gains with some interest in carry trades.
Nevertheless, the dollar drifted back to around 103.70 with narrow ranges as the yen gained ground against the Euro The dollar was unable to challenge resistance levels around 105.0 even though there were gains in US equity prices.
Sterling hit selling pressure above the 1.99 level against the US dollar and weakened sharply to lows near 1.9710. The decline primarily reflected US currency strength rather than Sterling weakness and the UK currency was able to strengthen to highs around 0.78 against the Euro.
The PMI index for the manufacturing sector edged lower to 51.0 in April from 51.3 the previous month, but there will be some relief that a more substantial deterioration was avoided and the high prices component reinforced inflation fears.
Sterling also drew support from the Bank of England’s financial stability report with the bank taking a generally optimistic view that credit conditions were easing while banking-sector losses would be lower than expected. The report helped boost risk appetite which supported Sterling while there was also reduced speculation over aggressive interest rate cuts.
The dollar found support below 1.0350 against the Swiss currency on Thursday and pushed to a two-month high around 1.05, boosted in part by the ability to break Swiss currency support close to 1.0430. The franc fluctuated either side of the 1.62 level against the Euro with a slightly weaker net bias.
Overall risk tolerances were still at an elevated level which undermined near-term demand for the Swiss currency as Wall Street pushed higher.
There will also be some unease over Swiss economic trends and fears will increase if there is a weak PMI report on Friday.
The Australian dollar drifted weaker in local trading on Thursday as the data did not provide any significant support. The PMI index was firm, but there was a sharp drop in building approvals which will reinforce unease over housing-sector trends.
The local currency weakened back to just below 0.94 as the US dollar rallied in early Europe. The US currency retained strength during the remainder of the day and the trend was enhanced by a drop in commodity prices. The Australian currency weakened back towards 0.93 as copper prices dipped sharply.