by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to lows around 1.4725 againstthe Euroon Wednesday, but managed to strengthen back towards 1.4655 later in US trade. The Euro hit selling pressure above the 1.47 level and was dragged down by late selling against the yen.
US retail sales rose 0.2% in October while underlying sales also rose 0.2% over the month and there was a small upward revision to the September figures. The data was certainly not strong, but there will be some relief that the data was not worse. Producer prices rose 0.1% over the month with underlying prices unchanged and this will ease inflation fears to some extent. This combination will ease immediate fears that the US economy is heading for stagflation. Sentiment will remain very fragile and an elevated reading for consumer price indexon Thursday would revive inflation fears.
The Fed has announced that it will issueeconomic forecastsmore frequently to improve transparency and the publication of more frequent inflation forecasts could eventually lead to inflation targeting. There will, however, be no short-term policy implications.
Third-quarter Euro-zone GDP growth was slightly above expectations at 0.7%, but there will be fears over a sharp slowdown for the fourth quarter as tighter credit conditions take effect.
The dollar recovery extended on Wednesday with a high of 111.70 as immediate Japanese currency demand faded while the Euro peaked at highs above 164.0. The yen regained some ground in late US trade as Wall Street stumbled to a weaker close.
Official warnings over rapid currency gains have helped curb short-term yen buying. There is likely to be further caution over dollar selling below the 110.0 level against the yen, especially as protests against currency gains would then be likely to intensify.
The yen will also tend to weaken if there is a sustained recovery in risk appetite and advances in global stock markets. Underlying volatility is, however, liable to remain higher which will discourage aggressive carry trades. In this context, stock and currency markets will need to prove resilient in the event of renewed credit-related stresses to provide more durable dollar support.
Sterling pushed stronger after the UK earnings data on Wednesday, but then fell sharply after the inflation report. Sterling fell to near 2.0520 against the dollar from highs above 2.08 and also weakened to four-year lows against the Euro at close to 0.7135.
The headline earnings data rose to 4.1% in September from 3.7% previously, but the underlying figure remained subdued at 3.7%. There was a further 9,900 decline in unemployment which suggests that the labour market is still relatively firm.
In its quarterly inflation report, the Bank of England forecasted that inflation would meet the 2.0% target in 2008 on the assumption that interest rates are cut at least once. The bank also warned over downside risks to growth and that the outlook for the economy was less benign. Given that headline inflation is being pushed up by higher food and energy prices, the bank’s forecast will be something of a surprise and could indicate deeper bank concerns over economic prospects which will undermine Sterling sentiment.
The comments suggest the bank would prefer to wait until February before cutting rates, but there will be growing speculation over a December move which will tend to keep Sterling on the defensive unless there is a very strong retail sales report on Thursday.
The Swiss currency tested 12-year highs beyond 1.12 against the US dollar on Wednesday, but the franc was unable to hold the gains and weakened back to 1.1235 later in New York.
The Swiss currency trend against the Euro remained strongly correlated with stock market moves and, after weakening to 1.6480, the franc secured some renewed support as Wall Street faltered.
The dollar will look for a larger correction stronger if it can sustain a recovery back above the 1.12 level against the franc.
As global risk appetite continued to stage a fragile recovery, there was anAustralian dollar high of 0.9070 against the US dollar. Domestically, there was a 4.5% drop in consumer confidence in the latest survey, although this was a moderate decline in the context of previous interest rate increases.
Global market trendsare likely to remain dominant in the short term and the Australian dollar will gain support if stock markets rally consistently. There will, however, be the continuing threat of high volatility with the dollar dipping back below 0.90 in US trade.