by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar again strengthened in European trading on Thursday and tested highs around 1.4725. The US currency was unable to break resistance levels, but found support around 1.4770 in US trade.
The US data retained the weaker tone seen throughout this week. New home sales rose slightly to 728,000 for October, but this followed a sharp downward revision for September to 716,000 and sales were still close to a 12-year low. There was a decline in inventories which offered some relief as prices were cut.
US jobless claims rose to 352,000 in the latest week from 329,000 previously which suggested some deterioration in the labour market, but third-quarter GDP growth was revised up to 4.9% from 3.9% previously. Overall confidence in the economy remains weak which is undermining dollar support with further expectations of a December interest rate cut.
The German labour-market data was firm with unemployment falling by a further 53,000 in October. There were still increasing concerns over the Euro-zone economy with increasing fears over the credit crunch impact as Libor rates remained at elevated levels. A greater degree of concern over European and global growth trends will provide some important dollar protection.
The yen was confined to narrower ranges on Thursday with support close to 110.30 against the dollar while it was unable to strengthen through the 109.50 region.
A more hesitant stance in global equity markets provided some significant yen protection, especially with increased exporter selling above the 110.0 level. Underlying fears over the global credit crunch impact are also likely to provide yen support.
The latest data recorded modest net capital outflows as flows out of Japan revived. Nevertheless, overall caution is liable to persist with speculative carry trade positions liable to be unwound very quickly on any renewed market stresses.
Domestically, the 1.6% industrial production increase did not have a significant impact as it was close to expectations and only a big increase in consumer prices would have a significant impact on interest rate expectations.
Sterling weakened back to beyond 0.7150 against the Euro on Thursday and the UK currency also re-tested low below 2.06 against the dollar. Although the UK unit recovered slightly, buying was more cautious than on Wednesday, especially with increased doubts over the UK economy.
Mortgage approvals fell to 88,000 in October from 100,000 the previous month while net consumer lending fell to GBP8.8bn from GBP10.8bn and the Nationwide Bank reported a 0.8% house-price drop for November, the weakest monthly figure for 12 years. The CBI retail survey was little changed, but pricing pressures were stronger.
The data will reinforce expectations of a significant slowdown in the economy and maintain pressure for lower interest rates, although inflation concern will persist.
There were mixed comments from Bank of England officials and testimony to the Treasury select committee was dominated by uncertainty with Governor King stating that the outlook was less benign. Officials are firm in expecting that the economy is slowing, but unsure how severe the slowdown will be. If inflation were not an issue, the bank would move to cut rates, but the MPC is still concerned over inflation, especially with rising food and energy prices.
Overall, the bank would probably prefer to delay a rate cut, but the credit tightening could still force its hand and cut next week, especially with Libor rates increasing again on Thursday.
The Swiss franc found support close to 1.12 against the dollar on Thursday and edged stronger to 1.1175 in US trade while the franc was able to resist further losses against the Euro with support beyond 1.65.
A more cautious tone on global equity markets provided support to the Swiss currency, especially with less confidence over global growth prospects.
The Swiss inflation data will be watched closely on Friday and a strong set of data would reinforce expectations of higher interest rates in December.
The Australian dollar was unable to hold above the 0.8850 level against the US dollar on Thursday and weakened back to 0.8810 in cautious trading.
The domestic data was weaker than expected with a 6.5% drop in third-quarter business investment which will raise some concerns over the growth outlook, especially if credit stresses persist. Wider unease over growth prospects will also pose a continuing risk to commodity prices. The enthusiasm for carry trades could also still reverse rapidly with volatility still a very important feature.