by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The weekend communiqufrom G7 members maintained references to excessive exchange rate volatility being undesirable and that currency rates should reflect fundamentals. There were, however, no specific references to the dollar, Euro or yen with the US appearing to reject European calls for a tougher stance against dollar weakness. The lack of G7 support undermined the US currency which then dipped to record lows near 1.4350 in Asian trading on Monday.
The dollar regained ground sharply in European and US trading on Monday with gains to highs near 1.4125, the sharpest one-day Euro retreat for 16 months. The Euro was undermined by wider selling on the crosses with particularly sharp losses against the yen.
There may also be some suspicions over covert intervention to depress the Euro which will curb renewed buying, at least in the very short term. The Euro remains vulnerable to some corrective pressures given the high number of long speculative positions with scope for significant profit taking.
The dollar gained some defensive support from an increase in risk aversion with weakness in key emerging-market currencies such as Brazil providing some additional US currency support.
There were also fears over the wider globaleconomyas credit fears intensified over the past week. Although prime concerns still surround the US economy, there were increased fears over the Euro-zone economy as well and this will offer dollar protection. A persistent lack of confidence in the economy will make it more difficult for the dollar to secure any significant buying support, especially with IMF chief Rato warning over the risk of a rapid currency fall.
Yen volatility increased sharply again on Monday. The general increase in risk aversion pushed the Japanese currency to highs near 113.35 against the dollar while the yen also strengthened sharply to highs near 160.50 against the Euro before a partial retreat.
Increased volatility levels will discourage yen selling in the short term with a reduced flow of funds into carry trades. The Japanese government also upgraded its outlook for the Japanese industrial sector which will tend to increase institutional yen support given unease over global growth trends.
G7 members intensified demands for the Chinese to let the yuan strengthen at a faster pace and the pressure will also provide some wider Asian currency support. Continued resistance to a significant policy shift by Chinese officials, would tend to lessen the potential for yen gains, although risk conditions may dominate if global equity markets continue to weaken.
Sterling pushed to a high around 2.0550 against the dollar in Asian trading on Monday, but then reversed sharply as the dollar regained ground against the Euro. The UK currency weakened back to 2.0260 against the dollar before edging back to 2.03 and was unable to make any headway against the Euro.
The general rise in risk aversion will tend to unsettle Sterling, especially as there will be an increased risk of investment outflows from the UK and a reduction in carry trades.
There has also been further speculation over a cut in interest rates despite the firm third-quarter GDP data released last week. The renewed credit-related fears and increased unease over US economic trends has also undermined confidence in the UK economy. Near-term evidence on the housing sector will remain under close scrutiny.
The Swiss currency continued to edge stronger against the Euro on Monday with an advance to 1.6645. The US dollar found support close to 1.1610 against the dollar and pushed back to 1.1770 in a significant US correction from losses seen late last week.
The Swiss currency will continue to gain some support from the renewed increase in risk aversion as global credit fears have returned. The franc will also secure support from any sustained weakness in emerging-market currencies.
The Australian dollar dipped to 0.8850 in Asian trading on Monday before a tentative recovery. The sharp drop in Asian stock markets unsettled the Australian currency as risk aversion spiked again. Domestically, the producer prices data was stronger than expected with a 1.1% third-quarter increase, although the consumer inflation data on Wednesday local time will be more important for interest rate expectations. A subdued figure would undermine the currency with reduced expectations of a November RBA tightening.
Risk conditions will remain very important and the Australian dollar will find it difficult to make significant headway while credit fears remain higher. The Australian currency dipped sharply to near 0.8750 in early US trading before a recovery back to 0.88.