by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to fresh record lows around 1.4280 in early Asian trading on Monday with the trade-weighted index at new 15-year lows. The US currency secured a tentative recovery against the Euro in European trading, but was unable to break the 1.42 level.
The ISM index for the manufacturing sector declined to 52.0 in September from 52.9 the previous month with price increases slightly lower than expected. The positive employment component will lead to some caution over selling the dollar aggressively ahead of Friday’s employment report even though reported manufacturing jobs fell sharply last month.
Further Wall Street gains are likely to trigger some unease within the Fed over the implications of a further lowering in interest rates and there is the potential for more cautious remarks over policy from central bank officials.
ECB President Trichet stated that he had noted with extreme attention US comments from officials such as Treasury Secretary Paulson that a strong US dollar was in the US economic interest. The comments continue to suggest that the European authorities are now more concerned over the Euro’s level with Euro group President Juncker also reinforcing the tone of greater concern over current exchange rates.
European officials are likely to increase pressure on the US to provide greater dollar support and will look for a more decisive stance on exchange rates at the October 20 G7 meetings. The pressure will intensify if there is further evidence of a sharp Euro-zone slowdown and this will deter Euro buying.
The yen was unable to hold stronger than 115.0 against the dollar and weakened to lows around 116.0 while the Japanese currency also weakened to near 165.0 against the Euro.
The strengthening of risk tolerances will tend to undermine the yen in the short term with a renewed flow of funds into high-yield instruments. Caution will still be required given that credit fears and risk aversion could quickly revive.
The Tankan index of business sentient held steady at +23 for September while investment and profit estimates were revised slightly higher. The data will provide some relief over the Japanese economy given that a slight deterioration had been expected. The figures were not, however, strong enough to trigger a decisive move towards a Bank of Japan interest rate increase in October.
Sterling peaked close to 2.05 against the dollar and weakened to lows below 2.04 before recovering while the UK currency also hit resistance close to 0.6950 against the Euro.
The UK PMI index for the manufacturing sector weakened to 55.1 in September from 56.3 the previous month, although the figure was still firm in an historic context which will limit the impact, especially with the Euro-zone indicators weaker.
The housing data all suggested a slowdown although there was no evidence at this stage of a sharp deterioration. Net lending growth relating to housing was at the slowest rate for 18 months while mortgage approvals were at a six-month low.
The UK currency has discounted some slowdown, but will still be vulnerable to more substantial downward pressure if there is evidence of more substantial deterioration. There is also likely to be caution over Sterling buying ahead of Thursday’s Bank of England interest rate decision.
The Swiss franc weakened to lows around 1.6650 against the Euro on Monday and was unable to regain the 1.66 level as sentiment remained weak The US currency was unable to sustain a move back above 1.17 against the franc.
The Swiss PMI index weakened significantly to 57.6 in September from 65.1 the previous month which will cause some concern over the Swiss economy even though last week’s KOF index was strong. A low inflation reading on Tuesday would further undermine near-term franc sentiment.
The Australian dollar has continued to strengthen, with fresh 18-year highs against the US dollar as the US currency has remained under pressure. The Australian dollar pushed to highs above 0.89 on Monday and resisted a significant correction.
The Australian dollar is gaining directly from weak confidence while the buying interest in being compounded by the high level of commodity prices and strong interest in high-yield currencies. Market interest in the Australian dollar will remain strong in the short term, but there is the risk of at least a limited correction.