by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar remained under pressure on Monday, struggling to secure more than limited relief. The US currency weakened to lows around 1.4440 against the Euro and was close to 1.4425 in US trading after a brief recovery to 1.4375.
There were no significant US data releases during the day to influence the market with attention focussed on this Wednesday’s Fed interest rate decision. Markets are still expecting an interest rate cut, probably of 0.25%, although futures markets moved slightly to show a slight possibility that rates will be left unchanged. Overall dollar confidence will, however, remain very weak in the short term with persistent fears over a further deterioration in the economy.
EU commissioner for economic and monetary affairs Almunia stated that currency-market volatility needed to be addressed. Comments from Euro-zone and US officials will need to be watched very closely in the short term. So far, US Treasury Secretary Paulson has confined his remarks to the standard reference that a strong dollar is in the US interest. There is, however, the small possibility of a co-ordinated move to push the dollar stronger at the time of the Federal Reserve meeting.
The provisional German inflation data for October recorded a monthly increase of 0.2% which maintained the year-on-year rate at 2.4%. The inflation data will maintain inflation concerns within the ECB which will help underpin the Euro.
The yen was unable to strengthen through the 114.0 level against the dollar during Monday. The Japanese currency weakened towards 114.80 as USstock marketscontinued to rally before edging back to 114.60 with international trends still dominant.
Domestically, the 0.5% retail sales increase in the year to September did not have a significant impact. There will be some caution ahead of the Bank of Japan’s interest rate decision on Wednesday as there is likely to be some speculation that the Bank of Japan will raise rates as part of a co-ordinated attempt to realign exchange rates.
The yen will tend to gain some support from strength in the Chinese yuan which pushed to record highs beyond 7.48 against the US dollar on Monday.
Sterling found solid support close to 0.7020 against the Euro on Monday which, allied with persistently weak dollar sentiment, pushed the UK currency to highs above the 2.06 level against the US currency. These gains put Sterling within reach of the 26-year highs seen in late July.
The latest Hometrack survey reported a 0.1% dip in house prices for October which slowed the annual increase to 4.4% from 5.0%. Mortgage approvals also fell in September to the lowest level for two years which will reinforce expectations of a slowdown in the housing sector, especially with a forecast that repossessions will rise sharply during the next year.
Consumer lending was stronger than expected, however, which will ease immediate fears over a sharp slowdown in the consumer sector and will tend to stem initial selling pressure on the currency. There is a more malign possibility is that the higher lending represents distress borrowing which would have very negative implications for the economy and Sterling.
The UK currency will also be influenced strongly by global risk conditions and there will be some net support if there are further stock market gains.
The dollar found support close to 1.16 against the Swiss franc on Monday, but struggled to make strong headway as overall dollar sentiment remained weak.
The 1.1600 region is important as the dollar needs to maintain support close to this level to prevent a further deterioration in confidence. The Swiss currency weakened to near 1.68 against the Euro as global risk tolerances remained higher.
The Swiss franc has been undermined by rising global stock markets as this has countered the underlying credit fears.
The Australian dollar moves have again been dominated by global market conditions with the Australian currency gaining further strong support from the US dollar weakness and sustained strength in commodity prices. The Australian dollar pushed to fresh 23-year highs above the 0.9250 level against the US currency before a retreat to 0.9180.
Domestically, there was a dip in business confidence, although the index was still at historically high levels. There are still expectations that the Reserve Bank will increase interest rates in November despite some government suggestions that a further tightening may not be required.