by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to fresh record lows around 1.4750 against the Euro on Friday, but then recovered to highs around 1.4635 before settling close to 1.4670. The Euro was undermined by selling pressure against the yen while increasing risk aversion also encouraged a safe-haven flow of funds into the US currency.
The fresh spike in risk aversion was triggered in part by the announcement of US$1.1bn in bad debts by Wachovia while there were persistent rumours of further write-downs. Dollar support was limited by the fact that fears were concentrated over the US financial sector.
The US trade deficit narrowed to US$56.5bn in September from a revised US$56.8bn the previous month as exports rose 1.1%. The shortfall was the lowest for 28 months and will reinforce optimism over a sustained improvement in the underlying deficit which will provide background dollar support.
In contrast, the University of Michigan consumer confidence index fell to fresh 2-year lows at 75.0 in October from 80.9 the previous month which will reinforce the downbeat expectations over consumer spending. Markets also continued to price in further Fed interest rate cuts which undermined the dollar’s yield support.
The latest French and Italian industrial production figures were both significantly weaker than expected with a monthly decline of over 1.0%, reinforcing fears over a Euro-zone slowdown. There were no clear warnings over the Euro’s level from officials, but markets will remain nervous over the threat of intervention.
The yen hit further resistance close to 112.0 in Asian trading on Friday, but the Japanese currency then strengthened sharply in European trading. The yen strengthened to 18-month highs near 110.50 against the US dollar and also pushed to near 162.0 against the Euro before weakening later in US trade as global financial stocks attempted to rally.
The yen gained support from underlying risk aversion with yen gains accelerating after Wachovia’s announcement of additional debt write-downs.
The Chinese yuan continued to strengthen on Friday as the central bank tolerated further gains. There was speculation over a further interest rate increase and a yuan revaluation which also underpinned the Japanese currency.
There will be some speculation that the Japanese Finance Ministry will encourage institutional yen selling near recent dollar lows with officials looking to maintain a strong competitive position to support the industrial sector.
Sterling pushed to highs around 2.1160 against the dollar on Friday and initially proved to be resilient after the trade data. The UK currency then weakened sharply with lows below the 2.09 level while Sterling also weakened to lows around 0.7020 against the Euro.
Sterling was undermined by rumours that Barclays Bank would be forced to announce substantial sub-prime mortgage-related losses which undermined confidence towards the wider financial sector and the UK currency.
The total visible trade deficit rose to GBP7.8bn for September from GBP6.9bn the previous month and this was the highest deficit on record. The deficit was inflated by rising imports and, although this may indicate resilient domestic demand, there will also be increased fears over the competitive position which will tend to undermine the UK currency. There will be medium-term concerns that the deficit is moving beyond sustainable levels.
The Swiss franccontinued to advance against the Euro on Friday with a peak close to 1.6450. The franc also strengthened to highs near 1.12 against the US currency, breaking below the dollar support levels seen at the end of 2004, before edging weaker later in US trade as Wall Street rallied.
The Swiss currency was underpinned by defensive demand as global stock markets came under renewed selling pressure. In this context, the franc has gained stronger support this week than during the bout of credit-related tensions seen in August.
The latest consumer confidence survey held firm for October which will maintain optimism over the domestic economy.
The Australian dollar was unable to hold above the 0.93 level on Friday. Domestic yield support remained intact with investors still speculating over a further increase in interest rates after the hike seen this week. The Australian yield expectations will remain in sharp contrast with speculation over further cuts in US interest rates.
Global market conditions will also remain very important and underlying risk aversion will continue to undermine the Australian currency with reduced carry-trade flows from Japan. Increased risk aversion pushed the Australian currency to lows near 0.91 in US trade before a recovery to 0.9160.