by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar hit tough resistance near 1.4160 against the Euro on Monday and then weakened sharply to lows around 1.4240 ahead of the US market opening as overall sentiment remained negative.
The US currency secured some respite in New York as cross trading remained an important influence. Advances against the yen on lower global risk aversion initially helped strengthen the Euro against the dollar, but there was a significant reversal in US trading as Wall Street came under selling pressure.
The New York manufacturing index rose to 28.8 in October from 14.7 the previous month which was the strongest figure since July 2004. This will maintain some confidence in the industrial sector, although the impact will be limited as the correlations with national data have not been strong over the past few months.
Any comments from Fed Chairman Bernanke will be watched closely in the short term and an upbeat assessment of the economy from the Fed chief would tend to underpin the dollar.
The Euro is still being supported by indications of a firm ECB monetary policy. Fears over a more aggressive stance ahead of G7 meetings from the end of this week will tend to restrict Euro buying.
The yen remained under pressure in Asian trading on Monday and hit two-month lows around 117.90 against the dollar while the Euro strengthened to 167.70. Hopes that an investment bank fund would be created to buy distressed mortgage-related securities boosted risk tolerances and this weakened the Japanese currency.
The yen secured some significant respite in US trading as Wall Street came under selling pressure and Japanese currency moves will remain correlated strongly with global risk aversion levels in the short term.
Bank of Japan governor Fukui stated on Monday that there were uncertainties over the global economy. The bank’s outlook was cautious and there were no suggestions of an early interest rate increase which will lessen near-term yen support.
Global exchange rate policies will remain an important focus ahead of the G7 meetings at the end of this week. With underlying pressure for Asian flexibility and currency appreciation, there will be some caution over selling the yen heavily.
Sterling secured some respite from selling pressure on Monday as the housing data was stronger than expected. The UK currency pushed to highs around 2.0430 against the dollar and resisted a dip through 0.70 against the Euro
The latest Rightmove house price index recorded an increase in average prices of 2.7% in October after a 2.6% drop the previous month, although the data was distorted by new legislation. There will still be expectations of an underlying slowdown in the sector.
The key UK consumer inflation releases are due on Tuesday while the October Bank of England minutes will also be released on Wednesday. These events will have an important impact in determining near-term interest rate and currency expectations.
Overall Sterling volatility levels are liable to be high as interest rate expectations fluctuate. Currency moves will also be linked closely to levels of risk aversion with any retreat in global asset prices liable to curb Sterling support.
The Swiss franc found some further support close to 1.68 against the Euro and strengthened to 1.6770 in US trading while the dollar was also struggling to hold above 1.18 against the franc.
The Swiss currency strengthened in New York following a significant drop on Wall Street and franc moves will tend to remain correlated with global levels of risk aversion.
The retail sales data will also be watched closely on Tuesday as a firm figure would increase the potential for a December interest rate increase.
The Australian dollar again challenged levels above the 0.9050 level against the US dollar on Monday as sentiment remained strong.
The Prime Minister has called a federal election for November 24 and the direct impact will be limited. There will, however, be some speculation that the Reserve Bank will be more reluctant to increase interest rates in November ahead of the election which will undermine the Australian dollar slightly. The currency will continue to gain some support from high commodity prices and increased confidence in the international economy.
There will still be the risk of a sharp correction, especially if risk fears increase again and the Australian currency weakened to 0.8985 in New York trading on Monday.