by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar pushed to highs around 1.4015 against the Euroon Tuesday, but was unable to hold the gains and weakened back towards the 1.41 level ahead of the US FOMC minutes.
The minutes from September’s meeting reported a downgrading of 2008 growth and inflation forecasts while the Fed remained concerned over the housing sector. Members were also more confident that inflation would moderate, but warned over the impact of sustained dollar weakness. Future policy decisions would also be dependent on economic developments. Inflation references in the minutes and the comments from Fed Governors on Tuesday were slightly weaker than might have been expected which will unsettle the dollar.
The US currency edged lower to 1.4110, but the impact should be limited as markets wait for further evidence on growth trends.
Global exchange rate policies will remain an extremely important focus. Following the meetings of European Finance Ministers, there was no evidence of a unified stance for more aggressive action on the Euro at this stage with France unable to gain wider support for central bankintervention.
Eurogroup head Juncker stated that the Euro gains were more than enough to reduce global trade imbalances while ECB President Trichet also voiced concerns over the Euro, although his main focus was on the need for greater Asian currency flexibility Asia may be the prime area of focus in the run up to next week’s G7 meetings which will limit the dollar impact, although there will be wider caution over Euro buying.
The dollar found support below the 117.0 level against the yen and attempted to rally, but was struggling to make much headway. The Japanese currency was unable to sustain an advance against the Euro despite the European calls for firmer Asian currencies.
The recovery in risk aversion will maintain the potential for capital outflows from Japan and this will tend to limit yen support in the short term, although there is the clear threat of complacency over global financial conditions.
There will be further caution over selling the yen aggressively ahead of Thursday’s Bank of Japan policy decision, especially as the global recovery in risk appetite gives the bank a greater opportunity to increaseinterest rates.
Sterling weakened to lows around 2.0260 against the dollar on Tuesday before a recovery to 2.0370 later in US trading. The UK currency was unable to sustain four-week highs against the Euro.
The latest BRC retail sales data provided some relief with a 3.0% like-for-like sales increase in the year to September. Markets will monitor the latest house-price trends as this remains the key area of vulnerability for the economy.Bank of EnglandGovernor King stated that the bank would do whatever is necessary on inflation. Although he also stated that inflation had fallen quite sharply, the comments may dampen to some extent expectations of a near-term rate cut.
The total UK trade deficit narrowed to GBP6.85bn for August. The July deficit, however, was revised up to GBP7.4bn from the GBP7.1bn and the underlying trend is for a slight deterioration which will tend to undermine Sterling in the medium term.
The franc has remained under pressure against the Euro during the past 24 hours with a test of record lows close to 1.67. The Swiss currency also weakened to 1.1890 against the dollar before a recovery back to 1.1835 with the dollar unable to regain momentum after the minutes were released.
The latest UBS survey reported confidence in the third-quarter and were generally optimistic over the fourth quarter which should provide some franc support. National Bank Chairman Roth, however, warned over downside risks to the Swiss economy.
The Swiss currency will remain vulnerable to being used as a funding currency while global risk tolerances remain strong.
The Australian dollar found support above the 0.89 level against the U.S. dollar and pushed back to 0.8990 in New York as the US currency faltered with gains enhanced by a recovery in commodity prices.
The latest NAB business confidence index fell to the lowest level this year which will cause some unease over domestic trends. International developments are likely to remain more important at this stage and the Australian currency was undermined by a drop in metals prices over the past 24 hours. The Australian dollar will still tend to gain near-term support from the overall improvement in risk tolerances.