by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support weaker then 1.45 against the Euro on Monday and pushed to highs of 1.4445, but the US currency was again attracting selling pressure on rallies. Wall Streetremained an important focus with the overall impact a small net positive influence on the US currency despite persistent underlying fears over the negative impact of credit-related stresses.
The ISM services-sector index rose to 55.8 in October from 54.8 and compared with expectations of a further decline. The data will ease immediate fears over a sharp slowdown in the economy and there will be some surprise that the construction and real-estate sectors both recorded stronger activity in the month.
Fed Governor Mishkin reiterated that the Fed had cut interest ratesas a pre-emptive move and the remarks overall reinforced the fact that the bank had shifted to a neutral policy bias with Mishkin also stating that policy could be adjusted quickly if rates had been cut too far.
The ECB will remain an important focus ahead of Thursday’s council meeting. The central bank is liable to take a firm stance, but there is also likely to be speculation that the bank will warn more strongly over currency levels and this is likely to create some caution over short-term Euro buying. Euro-zone data will be monitored on Tuesday for further evidence on trends.
The yen pushed to highs around 114.35 in Asian trading on Monday and extended the gains in early US trading, but the dollar found further solid buying interest on dips towards 114.0 and also gained some ground following the US PMI data.
Confirmation of additional debt write-downs by Citigroup maintained a more defensive investor stance and yen buying support on Monday as theNikkei index fell to a 7-week low while other regional markets also fell sharply.
A sustained drop in equity markets would lessen the risk of yen selling within Asia to fundhigher-yield plays while higher market volatility will also tend to stifle carry trades. The lack of yield support will still tend to discourage yen buying while comments from Bank of Japan governor Fukui that policy should be tightened in a timely manner did not have a significant impact.
Sterling was unable to push back above 2.09 against the dollar on Monday and dipped to 2.08 after the UK data while the UK currency also weakened back to 0.6950 against the Euro.
Unease over financial-sector trends is still likely to be a significant negative Sterling factor if credit-related stresses intensify, especially as capital account trends are liable to be less favourable. The dropping of a Qatar-based bid for Sainsburys, for example will reinforce fears over weaker inflows.
UK industrial production fell 0.4% in September while there was a 0.6% drop in manufacturing production which will ensure a downgrading of the third-quarter growth data. The CIPS index for the services sector also weakened to 53.1 in October from 56.7 previously. The extent of the drop will cause some concern with the index falling to the lowest level since May 2003, while the prices index was slightly higher.
Expectations that interest rates will be left on hold for November has been supporting the currency over the past week. The weak releases on Monday are liable to revive expectations that rates will be cut before the end of 2007 which will be a negative Sterling factor.
The franc strengthened to 1.6670 against the Euro during Monday, but struggled to hold beyond 1.6680. The dollar again tested levels close to 1.15 against the franc before staging a fragile recovery.
The Swiss currency gained initial support from the rise in risk aversion as stock markets fell before a partial correction in New York.
The franc will gain further short-term support on fears over debt write-downs, although the impact will be offset to some extent by fears of losses within the Swiss financial sector.
The Australian dollar challenged levels above 0.82 against the US currency on Monday, but was struggling to make much headway.
Markets are still expecting a Reserve Bank interest rate increase this week which would reinforce Australian dollar yield support, although a decision to hold rates steady should not be ruled out.
Global credit-related difficulties will remain an important influence and the more defensive global investment stance will tend to limit short-term Australian dollar buying. Overall volatility levels are liable to remain higher in the short term.