by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to the 1.4685 level on Monday and pushed to highs around 1.4620. The US currency was unable to break any significant resistance levels as sentiment remained generally downbeat and drifted weaker in US trading.
Despite firm comments from Fed officials at the end of last week, markets are continuing to expect furtherinterest ratecuts.Futures marketsare pricing in around a 90% chance of a December cut with the steeper yield curve also suggesting expectations of further measures to underpin the economy which will tend to undermine the dollar.
The latest NAHB housing index was unchanged at 19 in October as the September data was revised up from 18 previously which may suggest some stabilisation in the sector. The starts and permits data will be watched closely on Tuesday amid expectations of a further monthly decline in activity. Some caution is required as seasonal influences can be important during the winter months, but only a strong recovery would trigger a significant reassessment of the situation.
Gulf states will discuss a proposal to adjust the dollar peg next month and underlying speculation over a revaluation of Middle East currencies will continue to unsettle the US currency with fears over a withdrawal of investment funds.
The still-high number of long speculative Euro positions will make it difficult forthe Euroto extend gains, especially if Euro-zone growth fears increase.
The dollar was unable to hold gains above the 111.0 level against the Japanese currency on Monday and weakened back to test levels below 110.0 in New York asWall Streetremained fragile with lows around 109.75.
The yen is still gaining underlying support from a reduction in high-yield trades. Any further rise in global inter-bank rates would reinforce fears of a liquidity squeeze over the next few weeks which would also increase the pressure for a reduction in carry trades. Any forced global liquidation ofinvestment positions could still put the yen under strong upward pressure, especially with liquidity at reduced levels this week.
Comments from Japanese Finance Ministry officials will be watched very closely in the short term as there are likely to be further warnings against yen gains when the dollar falls much below the 110.0 level.
The latest IMM speculative positioning data recorded a net long yen position which illustrates the underlying shift in market sentiment towards the yen, although it will also lessen the risk of position capitulation.
Sterling weakened to lows below 2.0450 against the dollar on Monday before fluctuating around the 2.05 level in US trade. The UK currency also secured a weak recovery against the Euro as consolidation was the dominant theme after recent heavy losses, although overall Sterling sentiment remained under pressure.
The latest Rightmove survey recorded a 0.7% drop inhouse pricesfor November which will maintain expectations of a significant slowdown in the sector and sap Sterling confidence.
UK inter-bank rates continued to increase on Monday with three-month LIBOR at a two-month high. The renewed increase in market rates will also fuel fears over further credit-related stresses and weaker lending within the UK which will increase pressure on the Bank ofEnglandto cut rates in December.
The franc remained strong against the Euro on Monday with gains to around 1.6360 while the Swiss currency has also continued to probe 12-year highs against the US currency with a high at 1.1150.
Underlying risk aversion remains at elevated levels and this will continue to provide important support to the Swiss currency as there is the threat of a further general retreat from carry trades.
A robust export performance in Tuesday’s trade data would also provide background franc support on economic optimism.
The Australian currency pushed to highs near 0.90 against the dollar in local trading on Monday, but was unable to sustain the gains and weakened back towards 0.8915 in early Europe.
There were no significant domestic trends with expectations of further interest rate increases still a secondary factor as risk aversion dominates. There is still the threat that carry trades will be unwound and any further deterioration in global credit markets would also undermine the local currency. The Australian dollar weakened to lows around 0.8830 in New York as stock prices were subjected to further selling pressure.