by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to sustain gains back through 1.41 against the Euro on Wednesday and weakened back to lows 1.4170. Trading conditions were strongly influenced by technical considerations and the US currency recovered to 1.4130 as the Euro failed to hold above the post-payroll low around 1.4160.
There has been a further important debate surrounding US interest rates over the past 24 hours. Following the Fed minutes on Tuesday and comments from Fed officials, there was some greater speculation over a cut in interest rates before the end of 2007. There is considerable uncertainty and markets are putting the chances of an October rate cut below 50%. The overall suspicion is still that the Fed will err on the side of cutting rates again, despite the underlying inflation doubts.
In this environment, markets are very cautious over buying the US currency. The dollar was also unsettled by remarks from former Fed chief Greenspan who stated that housing-sector difficulties would eventually undermine consumer spending.
The Euro gained some support from solid French and Italian industrial data which eased immediate fears over a deterioration in growth. There was still caution over aggressive Euro buying given fears that European officials will talk down the currency ahead of the G7 meetings next week.
The yen drifted weaker in Asian trading on Wednesday and losses extended to 117.50 against the dollar with the Japanese currency also weakening beyond 166.0 against the Euro. The Japanese currency secured some respite in US trading, especially with Wall Street drifting weaker, with the yen pushing back to 117.15.
The Bank of Japan will announce its latest interest rate decision on Thursday and the most likely outcome is that rates will be left on hold. The conditions are, however, now more favourable for a rate increase than last month , especially as global financial marketshave recovered. There is therefore, the possibility of a tightening, especially as it would deflect any potential G7 criticisms of Japanese policy, although Japan will not want to be seen as sparking a fresh round of global financial market volatility.
Overall, the chances of a rate increase look to be around 30%. The yen will strengthen if rates are increased or if Bank of Japan Governor Fukui signals a November increase, although gains could quickly attract selling pressure if risk tolerances remain high.
Sterling pushed to highs around 2.0470 against the dollar on Wednesday before drifting back to 2.0420. The UK currency also weakened towards 0.6930 against the Euro.
Sterling drew further support from Bank of EnglandGovernor King’s remarks on Tuesday as he appeared to play down the prospect of a near-term cut in interest rates with the UK currency also gaining from persistent doubts over US economic trends.
Markets will closely monitor the latest house-price trends as housing remains the key area of vulnerability for the UK economy. Any evidence of a sharp downturn in the housing sector would quickly revive speculation over a near-term cut in rates and put downward pressure on Sterling.
The Swiss currency continued to weaken against the Euro on Wednesday with all-time lows close to 1.6730 before a limited recovery. The franc also failed to sustain a move through 1.18 against the dollar, and settled around 1.1830, close to the levels seen before the Fed minutes on Tuesday.
The Swiss currency was unsettled on yield grounds with National Bank Chairman Roth stating that the bank was in a wait and see mode on interest rates. These comments curbed speculation over a December rate hike by the SNB. With global equity markets still generally firm, there was also increased willingness to take advantage of the higher yieldsavailable in other currencies, although sentiment could still turn sharply.
The Australian dollar has again challenged levels above the 0.90 level. Domestically, there was a solid reading for housing finance and consumer confidence held firm. The latest employment data will be watched closely on Thursday and a strong reading would reinforce expectations that the Reserve Bank will consider a further increase in interest rates while a weak report would deflate optimism.
The sustained improvement in risk appetite will also help support the Australian dollar in the short term, although volatility levels could still increase which would pose important risks to the currency.