by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar remained under pressure on Tuesday, weakening to fresh all-time lows against the Euroaround 1.4570, while the dollar was also at fresh lows on a trade-weighted basis. The US currency was unsettled by persistent reports of Euro buying by European central banksduring the session.
There were no significant data releases on Tuesday, but overall confidence in the US economy remains at depressed levels. Markets are still concerned that there will be further credit-related debt write-downs by the major US investment banks which is having a negative dollar impact. There are fears that the economy is deteriorating while the speculation is also fuelling expectations that the Fed will be forced to cut interest rates again. In this context, markets are putting the chances of a December Fed rate reduction at above 60%.
The dollar will tend to remain vulnerable in the short term unless there is evidence that the global economy is deteriorating as well.
The Euro-zone retail sales data was subdued with the September increase held to 0.3% which cut the annual increase to 1.6%. There was also a sharp drop in German factory orders of 2.5% which cut annual growth to 1.1%. The ministry remained generally optimistic over the economic outlook, but doubts over the economy are liable to increase.
Euro-group head Juncker stated that he preferred a strong Euro to a weak one, but also warned that he was allergic to excessive volatility and markets will remain on alert for potential central bank intervention.
The dollar again found support close to 114.0 against the yen on Tuesday, but hit resistance close to 114.80 in generally cautious trading as the US currency remained under wider pressure.
Short-term yen sentiment is still being dominated by globalstock marketmoves and a tentative recovery dampened Japanese currency demand on Tuesday as domestic yields remained at very low levels. Wall Street fluctuated with fears over further debt write-downs not strong enough to cause sharp gains for the Japanese currency as the US market strengthened later in New York trade.
Former Fed Chairman Greenspan warned that Asian currencies would need to strengthen further against the dollar and this will provide some yen support, although a substantial impact is unlikely unless there is a decisive move by China to allow a much stronger yuan through a one-off revaluation.
Sterling edged weaker against the Euro on Tuesday with lows near 0.6980, although losses were contained given the underlying Euro gains. The UK pushed to highs around 2.09 against the dollar before weakening back to 2.0860 in cautious markets.
The disappointing UK economic data series continued to Tuesday with the British Retail Consortium (BRC) reporting a 1.0% like-for-like annual increase in retail sales which was an 11-month low for the series. The retail data will maintain expectations of a slowdown in the economy, especially after weak releases on Monday.
There will also be growing unease over the impact of the credit crunch, especially as the financial sector has been a key driver for UK growth as a whole. There is likely to be some speculation over a Bank of England rate cut this week which will tend to dampen Sterling support over the next 36 hours.
The Swiss currency pushed to highs beyond 1.6650 against the Euro on Tuesday while the franc also hit the strongest level against the dollar since January 2005 with a move to highs around 1.1425 before a retreat to 1.1450.
The franc continued to gain support from underlying credit-related stresses and fears over further debt write-downs by global banks.
In its latest report, the OECD was generally upbeat over prospects and stated that further interest rates may be needed. These remarks also provided support to the Swiss currency, especially with expectations that US interest rates will be cut again.
The Australian dollar has tackled resistance levels above 0.92 over the past 24 hours, primarily reflecting a continued lack of US confidence and there was a peak close to 0.9280 in US trade as Wall Street recovered.
Domestically, the main focus will be the Reserve Bank interest rate decision which is due early on Wednesday local time. Markets are still expecting a 0.25% rate rise to 6.75% and a hike would reinforce yield support, although the impact is likely to be measured given that an increase is priced in.
The currency will also fall sharply if rates are not increased and the underlyingcredit riskswill continue to restrict demand for the Australian dollar, especially if global stock markets retreat again.