by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support beyond 1.43 against the Euro on Friday and strengthened to 1.4250 following Bernanke’s comments. The US currency was unable to sustain the gains and weakened back to 1.4290 late in US trading. The sharp drop onWall Streetshould provide some defensive support to the US currency, but sentiment remains highly negative.
Global exchange rate policies will remain an important short-term focus. The draft communiqufrom G7 members suggests that there will be further references to excessive exchange rate volatility being undesirable and that currency rates should reflect fundamentals. The initial drafts indicate that there will not be specific references to the dollar, Euro or yen. Such an approach would tend to undermine the dollar next week with reduced speculation that there will be more decisive measures to support the dollar.
There was no significant economic data on Friday, but sentiment towards the economy remained at depressed levels following the weak housing data this week Fed Chairman Bernanke warned that the Fed should not over-react to economic developments and he also stated that it was very difficult to assess the underlying economic performance. The remarks should, in theory, dampen expectations that the Fed will cut interest rates again in October.
Market confidence has deteriorated, however, and the markets are now pricing near a 100% chance that the Fed will cut rates again this month. These expectations will tend to keep the dollar on the defensive in the short term.
The yen was unable to sustain a move through the115.0 level in Asian trading on Friday and weakened back to 115.40. The Japanese currency secured fresh support in New York as Wall Street came under strong selling pressure. The yen strengthened to 114.65 against the dollar and three-week highs through the 164.0 level against the Euro.
The sharp drop for US stocks increased risk aversion and there was also renewed fear over credit riskin the markets with major-market credit risk indicators rising to the highest level since late July. This combination will curb any capital outflows from Japan and also boost defensive yen support.
G7 will maintain or intensify the pressure on the Chinese to let the yuan strengthen at a faster pace and the yen will also tend to remain supported in the very short term. Resistance to a significant policy shift by Chinese officials, would tend to weaken the yen slightly next week, although risk conditions may dominate if global equity markets continue to weaken.
Sterling found support above 2.04 against the dollar on Friday and strengthened to test levels above 2.05 as the US currency came under pressure. The UK currency also resisted a decline through 0.70 against the Euro.
The initial UK third-quarter GDP report recorded growth of 0.8% to give annual growth of 3.3% which will underpin near-term confidence in the economy. Surprisingly, growth was led by strong gains in the business and financial services sector.
This data will help underpin economic confidence, at least in the very short term, although there will be concerns that the financial sector will deteriorate sharply in the fourth quarter. The net short-term impact will be to dampen expectations of a near-term Bank of England rate cut which will support Sterling, although sentiment would quickly turn if the housing sector weakens sharply.
A general rise in risk aversion will tend to unsettle Sterling, especially as there would be an increased risk of investment outflows from the UK currency.
The Swiss currency secured a further advance against the Euro on Friday with gains to around 1.6680 and it also pushed to highs around 1.1660 against the dollar as US sentiment deteriorated.
The general increase in risk aversion will provide further short-term support, especially as credit-related difficulties have intensified. There is likely to be much-reduced confidence in using the Swiss currency as a global funding currency.
The Australian dollar was unable to regain the 0.90 level on Friday despite US dollar weakness. The Australian currency peaked around 0.8970 and dipped back towards 0.8910 as Wall Street came under strong selling pressure.
Risk aversion levels have increased again with renewed credit-related fears and further downward pressure on global stock markets which will tend to undermine the Australian currency. The domestic influences will be limited until the latest inflation data next week and a subdued figure would lessen near-term Australian dollar support.