by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to near 1.47 against the Euro in early Europe on Thursday before strengthening back to 1.4610 and settling around 1.4620 late in New York. The dollar again secured some support from the elevated levels of risk aversion which prompted an underlying reduction of carry trades. The US currency also gained some support from weakness in currencies such as the Chilean peso and a strong flow of defensive funds into US Treasuries due to uncertainty over credit-market conditions.
US consumer prices rose 0.3% in October, in line with market expectations, while the core increase of 0.2% also met consensus estimates. The data will not trigger a significant change in near-term interest rate expectations with markets still watching credit conditions closely.
The New York manufacturing index held firm at 27.4 for October while the Philadelphia Fed index was also above expectations at 5.0, although this was offset by a dip in the underlying components.
The latest capital flows data will be watched closely on Friday following the large deficit on long-term capital recorded for August. A second successive outflow in the September data would reinforce an underlying lack of dollar confidence.
Euro-zone inflation held at 2.6% in October according to preliminary estimates while there was an underlying rate of 1.9%. ECB officials continued to take a firm stance on inflation in remarks on Thursday, but the bank has effectively signalled that interest rates are on hold for now.
The yen strengthened to highs around 110.30 against the dollar in Europe on Thursday as equity markets weakened and, although the US currency was able to strengthen temporarily back towards 111.0, the Japanese currency strengthened again later in US trading. The yen is still gaining underlying support from a reduction in carry trades, especially with uncertainty over global credit trends.
The latest capital account data recorded a strong flow of capital into Japanesemoney-market fundswhich offset the impact of steady capital outflows and there will be some fears over heavy capital repatriation back to Japan. The degree of official protests against yen strength will be monitored closely if there are renewed dollar losses to below 110.0.
The European Union has again called for a stronger Chinese currency which will provide some small degree of background yen support.
Sterling regained some ground in early Europe on Thursday, but was then subjected to fresh selling pressure. The UK currency weakened to near 2.0420 against the dollar and also hit a 54-month low against the Euro at close to 0.7170.
Retail sales fell 0.1% in October after a downwardly-revised 0.3% increase in September which cut the annual increase to 4.4%. The data will reinforce the lack of confidence towards the UK economy and currency even though spending held reasonably firm over the past three months. There will be further speculation over a December cut in interest rates which will unsettle Sterling.
The UK currency moves will also be dependent on carry-trade trends and an underlying net reduction in aggressive positions will tend to erode Sterling support as hedge funds move out of the UK currency. The renewed increase in inter-bank rates will also fuel fears over further credit-related stresses which would undermine the UK currency.
The franc resisted a test of support close to 1.65 against the Euro on Thursday and strengthened back to 1.6425 in US trade. The Swiss currency was unable to sustain gains beyond the 1.12 level against the dollar, but resisted more than significant losses.
The Swiss franc is still gaining underlying support from a liquidation of carry trades with a move back into more defensive assets and the extent of carry-trade liquidation will remain a crucial short-term issue for the Swiss currency.
International trends remained generally dominant for the currency on Thursday with the Australian dollar gaining some initial support from a short-lived temporary recovery in metals prices.
The positive impact was offset by persistently high levels of risk aversion and unease over global stock market trends. These uncertainties will persist in the short term and choppy trading is also liable to continue. As gold prices fell sharply on Thursday and equity markets came under fresh selling pressure, the Australian currency was subjected to renewed selling pressure with a decline to near 0.8850.