by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened rapidly in European trading on Wednesday with highs around 1.4715 as the Euro was subjected to profit taking. The dollar was unable to sustain the gains and weakened sharply to lows around 1.4850 in New York.
US existing home sales remained weak in October with an annual rate of 4.97mn from 5.03mn previously which was the lowest figure since 1999. There was a further increase in inventories which will reinforce unease over future sales trends while there was also a decline in prices.
The durable goods orders data was also disappointing with a 0.4% monthly decline while core orders fell 0.7% and the data overall will maintain unease over the economic trends. The Beige Book reported that growth had slowed with tighter lending standards while the housing sector remained depressed, although commercial lending was firm. Core inflation was described as steady or slightly lower.
Fed Governor Kohn took a generally cautious stance on the economy in comments on Wednesday and he also stated that the Fed could compensate for higher credit costs by lowering interest rates. Kohn also stated that the market needed to take account of rather than follow market expectations. Nevertheless, his overall comments, combined with the Beige Book, will reinforce expectations of a further rate cut. There will also be increased expectations of splits within the FOMC at the December meeting.
Euro-zone money supply growth was stronger than expected at 12.3% in the year to October which will maintain ECB unease over inflation trends and reinforce its reluctance to consider an easier monetary policy to help alleviate upward pressure on the Euro.
The yen initially gained support in Asian trading on Wednesday. The underlying mood of risk aversion was reinforced by a US$1.4bn Wells Fargo charge against mortgage-related losses and there was still caution over carry trades, especially with increased unease over global growth trends.
The yen then weakened consistently during the day with lows beyond 110.0 against the dollar as Wall Street gained strongly and there was fresh speculation over a cut in US interest rates which reinvigorated global risk appetite. Overall volatility levels are likely to remain high in the short term.
Domestically, there was a 0.8% annual retailsales increasefor October, the third consecutive increase, while the government upgraded its spending outlook. International developments will remain more important and the yen will gain some backing from speculation that the Chinese authorities will allow a faster pace of yuan appreciation.
Sterling dipped to lows below 2.06 against the dollar on Wednesday, but then regained ground and pushed back to test resistance levels above the 2.07 level. There was a fresh jump higher in US trading to 2.08 as the US currency came under fresh selling pressure and Sterling also strengthened to 0.7130 against the Euro.
Sterling gained some support from a general recovery in risk appetite and sustained buying interest in carry-trade currencies even though there was further upward pressure on UK inter-bank rates.
There were no significant domestic developments on Wednesday, but the comments from Bank of England officials will be watched very closely on Thursday. Any suggestion of a December rate cut would tend to undermine the UK currency.
The Swiss currency weakened sharply against the dollar on Wednesday with lows near 1.12 while the franc also weakened to near 1.65 against the Euro.
There was scope for a technical correction after recent gains and this pressure was reinforced by the recovery in risk appetite as Wall Street rallied firmly for the second successive day.
Underlying trading conditions are liable to remain uncertain in the short term with volatility at elevated levels. The Swiss currency then strengthened back to near 1.11 in US trade as the dollar stumbled badly.
The Australian dollar resisted a decline through the 0.87 level against the US currency on Wednesday and challenged levels above 0.88 in US trading.
Domestic influences remained limited with attention still focussed firmly on international trends. Commodity prices remained under selling pressure which initially curbed Australian dollar buying, especially with industrial metals prices still under pressure.
Any sustained recovery in risk appetite would support the Australian dollar and there were sharp gains to 0.8910 in US trading as the US currency came under pressure. There is still likely to be a mood of underlying caution as financial-sector unease persists with volatility set to remain high.