by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened on Tuesday, primarily in a reversal of the move seen on Monday as risk aversion eased. The Euro pushed to a high of 1.4630 and settled close to 1.4600 with some net benefit from Wall Street gains.
The US currency was unsettled by reports of UAE unease over the currency link to the dollar. Comments that the peg was at a crossroads reinforced market fears over a medium-term loss of confidence and a shift away from the dollar as regional currency pegs could be broken.
The domestic developments were limited, but a small 0.2% increase in pending home sales for September offered some hopes for stabilisation in the sector. The retail sales data will be watched closely on Wednesday with sales excluding gasoline likely to be particularly important for underlying dollar confidence.
The German ZEW index recorded a further decline for October to a record low of 32.5 from -18.1 previously while there was a 0.7% monthly decline in industrial production. The data will reinforce expectations of a significant Euro slowdown which will hamper the Euro.
The dollar resisted a further attack on the 109.0 level against the yen on Tuesday and pushed back to highs around 110.95 in US trading while the Euro regained ground to near the 162.0 level as US equity markets rallied strongly.
Japanese Prime Minister Fukuda voiced his opposition to excessive currency volatility which indicates that the government is taking the yen issue seriously, especially as it is unusual for the Prime Minister to comment on exchange rates. The Japanese authorities will look to discourage short-term yen gains through the important 109.0 region.
Domestically, the GDP data was slightly stronger than expected with a 0.6% third-quarter increase as exports performed strongly, although housing investment weakened. The Bank of Japan again voted by a 8-1 margin to hold interest rates steady at 0.50% with Mizuno voting for an increase. The central bank adjusted its monthly report slightly with a higher assessment of wholesale price inflation, but the yen gains this month will increase resistance to higher interest rates.
Carry trade liquidation abated on Tuesday while the UK currency was heavily over-sold on a short-term view. Sterling pushed to highs above 2.0750 dollar, but failed to hold the best levels and remained under pressure against the Euro with fresh 35-month lows.
The housing-sector data remained weak with the RICS index falling to -22.2 in October from -14.9 the previous month which was the lowest figure for over two years, although the principal feature was a slowdown in activity.
Consumer prices rose 0.5% in October which pushed the annual inflation rate to 2.1% from 1.8% previously, but the core reading was lower than expected as it held steady at 1.5%. The data will reinforce expectations that retail discounting is helping to offset the impact of higher food and energy prices.
The Bank of England will still be cautious over cutting rates in the short term unless there is evidence of a serious economic deterioration. The inflation report will be watched closely on Wednesday for further evidence on the bank’s near-term policy and weaker growth forecasts would hamper Sterling.
The dollar found support above the 1.12 level against the franc on Tuesday, but was unable to push above 1.13 as the US currency was unable to hold Monday’s gains. The Swiss currency drifted back to 1.6460 against the Euro.
National Bank member Jordan commented on Tuesday that the Swiss currency could gain rapidly on any unwinding of carry trades while he was generally downbeat on US dollar prospects. Jordan also suggested that interest rates were appropriate for now, but suggested that liquidity would be added if necessary which could, in extreme circumstances, require lower interest rates.
Near-term Swiss currency trends are still likely to be dominated by degrees of global risk aversion and the impact on carry trades.
The Australian dollar regained some ground in local trading on Tuesday with a corrective recovery back above 0.89 helped by an easing of upward pressure on the yen. The Australian currency was unable to regain the 0.90 level despite strong gains on Wall Street.
The domestic data releases did not have a significant impact with a solid reading for business confidence.
The degrees of global risk aversion will remain very influential in the short term and there is likely to be further underlying caution over conditions which will restrict carry trade activity.