by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar recovered to 1.4375 against the Euro in early Europe on Tuesday, but was unable to sustain the gains and weakened back to test levels beyond 1.4430 as underlying confidence in the economy and dollar remained depressed.
The dollar secured some support after aWall Streetarticle suggested that the Federal Reserve was either considering no change in rates or a 0.25% reduction. This dampened market speculation that there could be a 0.50% rate cut.
It is certainly the case that Wednesday’s Fed decision will be very important for near-term dollar direction. Given that a 0.25 move has been fully priced in, there is some scope for dollar relief if the Fed restricts a cut to 0.25%. No change in rates could trigger sharp initial gains, although underlying confidence towards the economy will remain depressed. A second successive 0.50% cut would be likely to weaken the dollar sharply.
The US economic data remained generally weak with consumer confidence dipping to a two-year low of 95.6 in October. The latest Case-Shiller house price index also recorded a 4.4% annual drop in prices in the year to August. The latest ADP employment report and GDP growth data will also be watched closely on Wednesday.
Official comments onexchange rateswill remain under close scrutiny in the short term. US Treasury Secretary Paulson stated that the US was strongly committed to a strong dollar which was a slightly tougher stance than usual. There will still need to be a more decisive and unified stance to have a significant dollar impact.
The yen was unable to make any significant move towards 114.0 against the dollar and weakened during Tuesday, although the dollar was also unable to break resistance levels around the 115.0 level.
The domestic data was mixed as the unemployment rate surprisingly rose to 4.0% in September from 3.8% previously. The jobs/applicants ratio held steady which suggests the labour market is still firm while there was a 3.2% annual increase in household spending which was significantly above expectations.
A senior Bank of Japan official stated that the possible side effects oflow interest ratesshould be taken into account and there is a small possibility of an interest rate increase on Wednesday. The Japanese currency would be likely to strengthen sharply if rates are increased, although gains may prove unsustainable.
The Swiss franc gained ground against the Euro on Tuesday with an advance to 1.6730. The Swiss currency also re-tested longer-term resistance levels against the dollar and broke below 1.16 in US trade with a move to highs around 1.1585.
The franc gained support from a solid UBS consumption index reading with a rise to 1.99 in September from 1.95 the previous month. Confidence will remain firm if there is a solid KOF index on Wednesday.
National Bank President Roth warned that the bank would take necessary measures if franc weakness persisted and threatened price stability. The comments suggested further rate increases were on the cards and a firm stance will help underpin the Swiss currency.
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.
There was still solid Australian dollar buying support on dips which quickly pushed the currency up from lows near 0.9150. There was some evidence on profit taking on long Australian dollar positions ahead of the US Federal Reserve meeting, especially with some speculation that the Fed might not cut rates.
There was also some profit taking in Asian stock markets which curbed short-term Australian dollar demand. Underlying confidence will remain robust in the short term given expectations that yield support will remain strongly in the Australian currency’s favour.