by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro dipped to a two-month low below 1.53 against the dollar in early Europe on Thursday, but then secured a firmer tone during the day.
As expected, the ECB left interest rates on hold at 4.00% following the latest council meeting and the main focus was on the statement following the announcement. ECB Chairman Trichet maintained a generally tough stance on inflation in his testimony. Trichet also pointed to downside growth risks and, despite the inflation rhetoric, the overall impression was that the bank was in a holding pattern to await further developments. The focus on inflation will still provide some initial Euro support as markets had speculated over a less robust stance.
Confidence in the ECB and Euro will tend to weaken if there is further evidence of a downturn in the Euro-zone data. The latest data recorded a 0.5% dip in March German industrial output, maintaining the generally weak data tone.
There has been some speculation that the US and Euro-zone authorities would look to promote a stronger dollar which provided initial support to the US currency. US administration officials did not make any major comments on the dollar during the day and ECB Chairman Trichet also held the recent line adopted by G7 with no aggressive comments to discourage Euro strength.
There will still be a suspicion that G7 will look to promote a stronger dollar, especially as this would tend to curb oil-price gains.
There were no major US data releases to offer market guidance, although the decline in jobless claims to 365,000 in the latest week from 383,000 previously will maintain a slightly more optimistic stance towards the economy and expectations of the Fed holding policy steady. The trade deficit figure should not have a major impact on Friday with markets looking for further evidence on growth trends.
The dollar held below the 105.0 level in Asian trading on Thursday as regional equity markets remained subdued. The US currency was being hampered by exporter selling while yen strength against the Euro also curbed any selling pressure on the Japanese currency.
The dollar again weakened to below the 104.0 level in US trading as there was some increase in risk aversion, although the yen pared gains with a move back to near 104.0 as Wall Street rallied.
The UK currency rallied in Early Europe on Thursday ahead of the interest rate decision.
The Bank of England left interest rates on hold at 5.00% following the latest MPC meeting. There is a strong probability that some members called for a cut in rates, but the vote split was not announced and there was no statement form the bank.
Sterling gained some initial support after the decision, but failed to make significant headway and drifted weaker in New York. There will be some fears that the Bank of England will further damage the economy by delaying interest rate cuts and there will be strong expectations of a reduction in June.
Overall Sterling sentiment also remains generally weak due to underlying fears over the housing sector, especially after the run of poor data over the past week.
The Swiss currency strengthened to around 1.6170 against the Euro on Thursday before consolidating around 1.62. The US currency was again unable to hold above the 1.06 level against the franc and dipped to lows below 1.05 before stabilising.
The franc gained some support form an increase in risk aversion and lower equity markets, although there was no evidence of strong buying.
The seasonally-adjusted Swiss unemployment rate edged higher to 2.6% in April from 2.5% the previous month which suggest that the economy is slowing, but international trends are likely to dominate Swiss moves in the short term.
The Australian dollar weakened to near 0.94 in early local trading on Thursday. The currency was undermined by wider US dollar gains while commodity prices also came off their best levels.
The domestic data was firm with a further 25,400 increase in employment for April which will curb any deterioration in confidence towards the economy even though the unemployment rate edged higher to 4.2%. The global trends will tend to dominate in the short term and the Australian dollar edged stronger as the US currency retreated.