by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was boosted in Asian trading by further media reports that the US administration was targeting a stronger dollar and had been instrumental in pushing for a stronger G7 stance on the US currency. The dollar pushed to a high around 1.5370, but was unable to break Euro support levels and weakened steadily back to lows around 1.5570 in New York The dollar was hampered slightly by a rally in oil prices during the day.
The comments from US and European officials will remain under close scrutiny in the short term with the EuroGroup finance ministers due to meet on Tuesday. Any sign of more decisive and aggressive rhetoric in support of the US currency would provide significant dollar support. ECB Chairman Trichet retained a firm tone on interest rates in comments on Monday, although there are some tentative signs that the bank is edging towards a more relaxed stance and the speculation will increase if the economic data deteriorates.
Regional Fed Governor Evans made mixed comments on the US economy in comments on Monday. He stated that the economy was running below potential, but that he was also optimistic over a recovery later in 2008.
There was no significant US data on Monday, but there will be important releases over the remainder of the week with the retail sales data on Tuesday. Any decline in sales would renew economic fears over the economy and tend to undermine dollar confidence. For now, markets are putting the chances of a further rate cut in June at around 10%, but a weak sales report would trigger some reassessment of the situation.
The Nikkei index proved resilient on Monday which lessened defensive demand for the yen while the domestic bank lending data was also weaker than expected which maintained unease over Japanese economic trends. Bank of Japan Governor Shirakawa was also generally downbeat on the Japanese economy which undermined the Japanese currency with comments that the immediate focus was on downside risks.
The US currency strengthened towards the 104.00 level with a technical correction following the sharp losses over the second half of last week. The dollar was also supported by a firmer trend on Wall Street with consolidation above 103.60.
Sterling dipped to lows below 1.9450 against the dollar in early Europe on Monday before rallying firmly to highs above 1.96. Conversely, Sterling was unable to sustain an advance against the Euro.
Producer prices continued to rise strongly in April with input prices rising 2.4% over the month with an annual increase of 23.3% which was the highest increase for over 20 years as energy and food prices continued to rise.
There was a stronger than expected monthly increase of 1.4% for output prices and, crucially, the core increase of 1.0% for the month was sharply higher than in recent months. The data will increase fears that inflationary pressure is building within the economy which will make it more difficult for the Bank of England to cut interest rates.
The consumer inflation trends will remain under close scrutiny on Tuesday and the data is liable to trigger further volatility. High inflation data will tend to provide further near-term Sterling support, although the longer-term implications would be less favourable.
The total trade deficit fell to a 9-month low of GBP4.0bn in March from GBP4.3bn previously which will provide some slight Sterling support, although the impact is likely to be limited.
The Swiss currency lost ground on Monday as immediate safe-haven demand faded. The franc weakened back to beyond 1.62 against the Euro and it also tested support levels beyond 1.05 against the dollar before recovering to 1.0450.
The Australian currency had a generally weaker tone on Monday, primarily due to domestic concerns. The latest home loans data recorded a sharp decline for the second month running which will increase fears of a sharp downturn in the housing sector and undermine the wider economy, especially as business confidence also deteriorated.
The local currency temporarily retreated back to below the 0.94 level before edging stronger again as the US currency was unable to sustain gains. A further retreat in metals prices prevented a challenge on the 0.95 level against the US currency.