by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to the 1.4780 level againstthe Euroon Friday and strengthened to test levels below 1.47. Position adjustment was important with markets also looking to trigger stop-loss orders. A break of support pushed the Euro down to lows near 1.4635 in New York.
The Chicago PMI index rose to 52.9 in November from 51.0 the previous month which will offer some relief over manufacturing, although the national data will be watched closely on Monday.
The core PCE price deflator was 0.2% in October with the annual increase edging higher to 1.9% from 1.8%. The core rate is still contained, but the data will remind the Fed that inflation is still a background presence.
Despite the inflation uncertainty, confidence over further Fed action to cut interest rates increased further after Bernanke’s comments with the Fed Chairman stating that the financial strains had affected the economy’s prospects. Although the dollar was vulnerable on yield grounds, there was some optimism that aggressive Fed action would lessen the recession risk while there were some hopes over a rescue package for sub-prime mortgages. This is important for the US currency given increasing doubts over global economic trends.
The Euro-zone inflation data was higher than expected with an increase to 3.0% in November from 2.6% the previous month. Sources from the ECB suggested that the bank would leave interest rates on hold throughout the next few months even though there would be a tightening bias. Given the high inflation data, this is a slightly dovish interpretation which will tend to undermine Euro demand slightly.
The yen had a generally weaker tone on Friday and weakened to lows around 111.20 against the US dollarbefore settling close to 111.0. Risk appetite remained generally stronger as equity markets attempted to rally further which undermined near-term yen demand. There are still important stresses within the money markets and volatility is liable to remain at elevated levels.
Domestically, there was a 0.1% increase in core prices in the year to October, the first increase for 10 months, but there is no evidence at this stage that the bank is considering an early increase in interest rates.
Sterling fluctuated around 0.7150 against the Euro on Friday and settled stronger at around 0.7125 as the Euro came under pressure. The UK currency failed to sustain a move to 2.07 against the dollar and dipped to weekly lows around 2.0550.
UK consumer confidence edged lower to -10 in November from -8 previously which was the lowest figure since March 2003 and will reinforce expectations of a slowdown in consumer spending.
There has been further debate over the interest rate outlook during the past 24 hours. There is still some speculation that rates will be cut next week, especially as money-market stresses continued on Friday with 3-month rates above 6.60%. This increase has continued to effectively tighten policy which will reinforce pressure for official rates to be cut to compensate. Despite uncertainty over December’s decision, expectations of a cut will tend to undermine Sterling.
The Swiss franc continued to weaken against the dollar on Friday with a move to lows around 1.1315 while the franc also weakened to beyond 1.65 against the Euro as global stock marketscontinued to rally.
Swiss consumer prices rose 0.5% in November with an annual increase of 1.8% and the higher than expected figure will keep the National Bank on alert over inflation, especially as there was a robust 0.8% third-quarter GDP increase.
National Bank member Hildebrand stated that interest rates should be used to react to the credit crisis only if is having an impact on the economy, but he also stated that the situation was deteriorating. The domesticeconomic data suggested that a further rate increases will be considered in December, but the bank will be cautious and the decision will be very close.
The Australian dollar has benefited from a recovery in risk appetite as US Federal Reserve officials continued to hint over a further cut in interest rates. The domestic data was solid with a 1.0% increase in October domestic credit while the third-quarter current account deficit was held to AUD15.6bn. The Australian dollar pushed to highs around 0.8895.
Trading conditions are liable to remain volatile in the short term and the renewed enthusiasm for high-yield currencies could reverse quickly as liquidity tightens. A general US dollar rally pushed the Australian dollar back to 0.8815 in US trade.