by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to make any headway on Monday and gains to 1.5450 on Tuesday were quickly reversed with the US currency weakening to lows near 1.56. The US currency was unsettled in part by a renewed increase in commodity prices as crude reach a fresh record high around US$122 per barrel.
Following the PMI services-sector index increase to 52.0 for April from 49.6, reported on Monday, there were no significant data releases on Tuesday.
The data releases over the past week will underpin the case for the Federal Reserve to keep interest rates on hold at the next FOMC meeting which will provide some further dollar support, although unease over the economy will persist with loan conditions being tightened and confidence will be fragile at best.
Fears over the Euro-zone growth prospects will continue as the Sentix confidence index weakened for April. There were also weak PMI readings for Spain, France and Italy. The focus will tend to be on the ECB this week with the latest council meeting due on Thursday.
The Euro will remain vulnerable to some further selling pressure if there is evidence of a less restrictive ECB policy. The central bank will still want to maintain a tough stance on inflation and it faces a tough balancing act. The unease over Euro-zone economic prospects helped push the Euro back down to 1.5525 later in New York.
The US data releases over the past week should reinforce the improvement in risk appetite. There will still be caution over the situation following the major central banks’ move to expanded their liquidity operations to counter a dollar shortage.
Domestic developments remained limited on Tuesday with a series of Japanese market holidays this week. The dollar was again unable to sustain gains above 105.00 during Tuesday and retreated in Asian trading as higher oil prices helped trigger caution over the dollar.
Following weaker than expected results from mortgage provider Fannie Mae, the dollar dipped to lows near 104.0. Levels of risk aversion will still tend to remain the dominant short-term influence on the Japanese currency and the dollar pushed back to 104.80 as Wall Street rallied.
The UK PMI index for the services sector was weaker than expected with a decline to 50.4 in April from 52.1 the previous month, the lowest figure since March 2003. The business conditions survey also deteriorated in the survey.
The weak survey will reinforce fears that the economy is slowing rapidly and there will be some renewed speculation that the Bank of England will consider another cut in interest rates this week. This will tend to put Sterling on the defensive in the near term as a rate cut is not priced in for this month.
The UK currency dipped to near 1.9650 against the dollar following the weak PMI survey, but recovered to trade above 1.97 while the UK currency also found support close to 0.7890 against the Euro. A weak industrial production report on Wednesday would reinforce speculation over a rate cut.
The Swiss franc strengthened to highs near 1.6250 against the Euro as risk aversion increased, but it was unable to sustain the advance and weakened back to 1.6330 later in New York. Similarly, the US currency weakened to 1.0425 against the franc before regaining the 1.05 level.
Annual inflation eased to 2.3% in April from 2.6%, but the National Bank will still have concerns as prices over the month increased by 0.9% and the annual rate remains significantly above its target level.
Overall franc trends are still likely to be dominated by the degrees of risk tolerances in global markets with the franc still very sensitive to equity market moves.
Commodity prices have remained generally strong and this pushed the Australian currency to a high of 0.9480 in early Asian trading on Monday. The Reserve Bank left interest rates on hold at 7.25%, but the statement was slightly weaker than expected as the bank reported that aggregate demand was significantly lower. There will be renewed unease over the domestic economy with particular fears surrounding the housing sector.
The currency will still tend to gain support if commodity prices remain at elevated levels and a rise in prices pushed the Australian currency back to near the 0.95 level in New York on Tuesday.