by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar remained under pressure on Friday, weakening to a fresh all-time low against the Euro. The US currency dropped steadily to lows around 1.4390 and was unable to secure any significant recovery in New York trading. The University of Michigan consumer confidence index fell to a revised 80.9 for October from the original 82.0 estimate. This was the lowest reading since May 2006 which, allied with poor data for this week as a whole, maintained the negative mood surrounding the economy and dollar.
Next week will be very important for the US currency with key economic data releases as well as the Federal Reserve interest rate decision on Wednesday. Markets have continued to price in fully a 0.25% cut in rates while speculation over a 0.50% rate cut has continued to increase due to mounting concerns over the US economy. Expectations of a rate cut will continue to undermine the dollar in the near term, especially as Fed officials have not issued any comments to discourage market speculation over a cut.
There have been some warning comments over the Euro’s level by Euro-zone officials. Euro-group head Juncker, however, stated that he preferred a strong Euro to a weak one. He also suggested that there were international policy divisions which will unsettle markets to some extent. Comments on exchange rateswill be watched very closely at the beginning of next week with a strong and unified stance required to underpin the dollar.
The dollar edged towards 114.50 against the yen on Friday, but struggled to hold the gains and drifted back towards 114.0 in US trading as ranges were narrower than in recent sessions.
There was still underlying caution over risk conditions. Global stock markets proved resilient, however, with expectations that further cuts in US interest rates would underpin demand for equities. Trading conditions are still likely to be uncertain and yen volatility is also liable to increase again next week.
Underlying Japanese consumer prices fell 0.1% in the year to September, the eighth successive decline, while industrial production fell 1.4% for the month. Both figures were in line with expectations and markets will assume that the Bank of Japan will keep interest rates on hold for the remainder of 2007 which will limit near-term yen support. The next Bank of Japan interest rate decision is due on Wednesday.
Sterling pushed to highs around 2.0570 against the dollar on Friday, but was unable to sustain the gains and weakened back to around 2.05. This reflected Sterling weakness rather than a dollar revival and the UK currency weakened back to test 2-year lows beyond the 0.70 level against the Euro.
In its latest report, the NIESR downgraded its 2008 GDP growth forecast to 2.2% from 2.6%, but upgraded its 2007 forecast due to resilient third-quarter consumer spending. The report still expressed concerns that spending growth would not be sustainable which would slow the economy as a whole.
There has been further speculation that the Bank of England will move to cut interest rates and this has undermined Sterling confidence. The housing and consumer lending data will be watched closely on Monday for further evidence on growth conditions and a weak set of data would reinforce expectations of a near-term policy easing.
The Swiss currency strengthened to near 1.1620 against the dollar on Friday, but was unable to break these two-year highs and the franc also weakened against the Euro with a drift towards 1.6720.
Swiss producer prices fell 0.3% in September which cut the annual inflation rate to 2.4% and this should ease immediate fears over inflation trends, although the impact will be limited.
Risk tolerances will remain important in the short term and the Swiss currency was undermined slightly by a move into commodity-linked currencies. The franc will tend to weaken if there are renewed advances in equity markets early next week.
The Australian dollar has been unsettled at times by risk aversion, but the weak US dollar trend has been the dominant influence over the past 24 hours. Wider US currency losses allowed the Australian dollar to strengthen to highs around 0.9170 in US trading on Friday which was a fresh 23-year high for the currency.
There were no domestic releases with sentiment still being underpinned by expectations of a November interest rate increase. In contrast, there was greater speculation over a more aggressive 0.50% US Federal Reserve rate cut which strengthened the yield differentials and boosted the local currency.