by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar resisted a further attack on the record low 1.45 level against the Euroon Thursday and strengthened to highs near 1.44, but there was still strong Euro buying support on dips as US currency sentiment remained very fragile. Wall Street and the Euro were unsettled by fears of further banking-sector losses and this provided some dollar support.
The US ISM index for the manufacturing sector weakened to 50.9 in October from 52.0 previously as production levels were weaker. The exports component was strong, however, while employment expanded slightly for the second successive month.
Jobless claims fell to 327,000 in the latest week from 333,000 and markets will look closely at the October employment data due on Friday. The state data suggested that September’s payroll figure could be revised down which would increase pressure for a strong headline figure to underpin the dollar. In this context, any payroll increase below 50,000 would intensify recession fears. Markets have increased the chances of a further December rate cut to over 50% which is offsetting the impact of an official neutral Fed policy.
The ISM prices component rose to 63.0 which will maintain concerns over the inflation risks from higher energy prices. The PCE core inflation deflator rose 0.2% in September while the annual increase was contained at 1.8%. The core data is still favourable, but there will be fears over a renewed increase from early in 2008.
The yen weakened to 115.90 against the dollar in early European trading on Thursday, but the Japanese currency secured renewed support in US trading with highs around 114.50.
Stock market influences remained important as the yen initially weakened following gains in the Nikkei indexbut then strengthened as Wall Street came under strong selling pressure.
Although Bank of Japan Governor Fukui warned that monetary policy should discourage speculation and carry trades, the yen will remain at risk whileinterest ratesremain at very low levels. The latest capital account data recorded a near-balanced position on solid overseas inflows which does not suggest that the yen will weaken sharply.
Sterling strengthened against the Euro on Thursday with a peak close to 0.6910. The UK currency also strengthened to highs above 2.0850 against the dollar before weakening as sentiment remained strong in choppy trading. The UK PMI index for the manufacturing sector fell to 52.9 in October from a revised 54.7 previously which will reinforce expectations over a slowdown in the economy.
For now, there are increased market doubts whether theBank of Englandwill sanction an early cut in interest rates and this is providing near-term currency support despite the weaker data flow. The UK currency moves will still be influenced by global risk tolerances and sustained credit fears would be unsettling. There will also be the risk of a sharp reassessment of the Sterling outlook if there is evidence of a serious housing deterioration.
The Swiss francfound further firm support close to 1.68 against the Euro and strengthened to 1.6715 while the dollar was unable to sustain a recovery back above 1.1620. Swiss franc moves were again correlated strongly with trends in global stock markets with sharp Wall Street losses underpinning the currency in New York.
The Swiss data retained the generally favourable trend seen this week with the PMI index rising to 60.7 in October which suggests healthy economic expansion.
National Bank member Jordan stated that the bank would act on interest rates if the inflation outlook deteriorated, although at the moment the bank had a balanced stance on interest rates.
The Australian dollarwas unable to sustain levels above 0.93 against theUS dollarand dipped sharply back to near 0.91 in US trading. The domestic retail sales data was stronger than expected with a 0.8% September increase and this reinforced expectations of a Reserve Bank tightening this month with markets pricing in over a 90% chance of a rate increase.
In contrast, the trade deficit was higher than expected at AUD1.86bn from AUD1.7bn previously as exports fell by 4.0%. Markets will tend to focus on yield factors in the short term, but the trade situation should not be ignored as the widening underlying deficit will represent an important medium-termcurrency riskespecially if risk tolerances decline on a sustained basis.