by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar remained under pressure during Friday and weakened to test fresh record lows around 1.42. A break of this level helped trigger further dollar losses with lows near 1.4270. Weak sentiment was compounded by institutional Euro demand ahead of the third-quarter end.
The US Chicago PMI index rose slightly to 54.2 in September from 53.8. The national ISM index will be watched closely on Monday for further evidence on US manufacturing trends, but only a very robust figure would boost dollar confidence.
The US core PCE inflation deflator rose 0.1% in August to give an annual increase of 1.8%, the lowest rate since 2004. The immediate inflation data is, therefore, still favourable, although there will be concerns over the fourth-quarter outlook, especially with oil prices at near-record highs.
Fed Governor Yellen stated that stabilising the economy should take priority, although this was more of a theoretical position while Poole stated that avoiding recession was an important goal. These remarks will fuel expectations of further Federal Reserve rate cuts and maintain weak dollar sentiment, although an October cut is already priced in. The issue of Fed credibility on price stability will be very important if inflation starts to increase.
The Euro-zone annual consumer inflation rate rose to 2.1% in September from 1.7% the previous month. With energy prices at elevated levels the ECB will not want to abandon its policy tightening bias. The ECB has also not expressed major concerns over the Euro’s level against the dollar, but there will still be caution over potential G7 action to stabilise currencies.
The dollar found support close to 115.10 in Asia on Friday with the Japanese currency struggling to make any significant headway as sentiment towards both currencies was generally weak The yen strengthened to 114.70 in US trading reflecting widespread dollar losses.
Domestically, unemployment rose to 3.8% from 3.6% while there was a 3.4% August industrial production increase. Although volatile, the production data, coupled with strong export growth, will boost confidence in the economy.
Core consumer prices fell 0.1% in the year to August which was in line with market expectations and will not strengthen the immediate case for higher interest rates. The growth data, however, will provide yen support, especially if there is a firm Tankan survey next week.
The latest capital account data recorded a high net outflow for the week which illustrates the fact that improved risk tolerances and rising global stock markets will tend to weaken the yen. There is still a growing risk of complacency over the global credit situation which could result in a rapid shift in market sentiment.There were also some reports that recent investment trusts set up to invest overseas were under-subscribed.
Sterling weakened in Asian trading on Friday, but the UK currency recovered strongly later in the day with highs above 2.0450 against the dollar. Sterling fluctuated around the 0.70 level against the Euro, settling around 0.6975.
The UK currency was damaged by reports that the Northern Rock bank had borrowed GBP5.0bn through the Bank of England credit line as this revived fears over an underlying deterioration in credit conditions, but dollar sentiment tended to dominate markets.
UK consumer confidence weakened to -7 in September from -4 the previous month. There is likely to be some speculation over a rate cut at next week’s Bank of England meeting which will tend to unsettle Sterling, especially against the Euro.
The Swiss currency remained on the defensive against the Euro during Friday, testing levels beyond 1.66. The US currency was unable to hold above the 1.17 level against the franc with losses to 1.1630 as the dollar came under sustained pressure.
The franc has been unsettled by renewed confidence in higher-yield commodity currencies. The Swiss currency will, however, tend to gain ground against the Euro if there is a deterioration in confidence surrounding the Baltic states as franc-denominated loans would be repaid and wider credit fears would return.
The Australian dollar has remained strong over the past 24 hours with support below the 0.88 level against the US currency.
The domestic data was firm with a 1.5% increase in August private credit which will reinforce expectations of a firm policy bias by the Reserve Bank. The currency will also gain important support from the strength of commodity prices. Nevertheless, underlying credit risks are liable to increase again which will tend to sap confidence in the currency. Dollar losses and firm gold prices dominated and this allowed Australian dollar gains to 0.8870 in US trading.