by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Fed Chairman Bernanke voiced further concerns over the economy by stating that there were downside risks to growth with particular stresses in the housing sector, although he also stated that the wider economy was resilient. Bernanke also commented that inflation was a concern with the weaker dollar posing a threat to import prices.
The remarks overall suggest that there will have reservations over cuttinginterest ratesagain in the short term, although the Fed chief also stated that policy would be highly data-dependent. The downbeat tone over growth and inflation will not improve investor confidence towards the US economy and unsettle the dollar. The latest jobless claims data recorded a decline to 317,000 in the latest week from 330,000 which will provide some limited relief.
The ECB left interest rates at 4.0% at the latest council meeting. In the press conference following the announcement, ECB president Trichet stated that the bank would act in a firm and timely manner on inflation, but there was no suggestion of an early increase in rates with Trichet omitting references to vigilance.
Trichet voiced concerns that the recent Euro moves had been sharp and abrupt. He also made reference to the comments on brutal moves seen in late 2004, but fell short of strongly criticising the Euro’s value. There will be speculation that Euro-zone governments have agreed not to protest vigorously against Euro strength if the ECB keeps interest rates on hold.
The yen weakened back towards 113.30 againstthe US dollaron Thursday, but the dollar was unable to sustain the gains and weakened to lows around 112.25 in US trading. For the second day running, a sharp drop on Wall Street strengthened the yen in US trading, but US stocks rallied in late trading which pulled the dollar off lows.
The domestic data was weaker than expected with a second successive sharp monthly decline in core machinery orders. The evidence suggests that the trend is broadly flat with a marginal third-quarter increase, but the data will maintain some unease over domestic and global growth trends with a small net negative yen impact.
Sterling weakened slightly ahead of the Bank ofEnglandinterest rate decision, but then strengthened to challenge fresh 26-year highs against the US currency.
The Bank of England left interest rates on hold at 5.75% following the latest MPC meeting. The bank did not issue a statement and the breakdown of the vote will not be known until the minutes are released in two weeks time. Unchanged rates reinforced Sterling’s short-term yield appeal and pushed the currency to highs above 2.11 against the dollar.
The latest HBOS survey reported a 0.5% drop in house pricesfor October, the second successive monthly decline, which will reinforce expectations over a significant slowdown. Although Sterling will look to secure near-term support on yield grounds, there will be increasing pressure for rates to be cut next month, especially if credit conditions deteriorate further.
TheSwiss francretained a firm tone against the Euro on Thursday, strengthening to highs near 1.6520, while the US currency was unable to hold above the 1.13 level. The dollar dipped to lows near 1.1250 before a tentative recovery.
The franc drew further support from global financial-market trends as equities remained under pressure while there were persistent credit-related fears.
Underlying confidence in the Swiss economy should remain firm in the short term with seasonally-adjusted unemployment holding steady at 2.6% for October.
The Australian dollar found support close to 0.92 against the US currency and strengthened back to challenge levels above 0.93. Thereafter, the currency fluctuated in a 0.9220-0.9290 range as it tracked Wall Street moves.
Domestically, the unemployment rate rose to 4.3% in October from 4.2% while the employment increase was held to 12,900 for the month. There was, however, a strong increase in full-time employment which suggests that the underlying labour-market data is still robust. Global market trends will tend to dominate in the short term and theAustralian dollarwill tend to hit selling pressure if there is a sustained increase in risk aversion.