by Darrell Jobman, Editor-in-Chief


The dollar remained under pressure on Wednesday and weakened to fresh all-time lows against the Euro beyond the 1.39 level. The dollar was unable to recover with no US data releases over the day.

US Treasury Secretary Paulson warned that the current credit crisis would take longer to work through than any of the crises seen over the past 20 years and these remarks will reinforce market fears over the US economy.

Paulson, however, was relatively cautious over the need for
lower interest rates and this may suggest that the Fed will limit an interest rate cut to 0.25% at next week’s FOMC meeting. Any reduction in expectations of a 0.50% rate cut could provide some dollar relief, although sentiment will remain very negative in the short term. The next major hurdle for the dollar will be the US retail sales data on Friday and a weak report would further undermine confidence.

There will be further unease over the Euro-zone economy and the fresh Euro gains will increase the risk of protests against currency strength by European government officials. There will also be the risk of significant friction between the ECB and Finance Ministers.


The dollar attempted to push above the 114.0 level on Wednesday with the yen undermined by selling against the Euro, but the US currency was still struggling to make significant headway. Retail selling will continue to curb yen gains in the near term, but global risk conditions will remain crucial.

The yen was undermined slightly on Wednesday by Japanese Prime Minister Abe’s resignation, but the impact was limited with markets still concentrating on risk aversion levels and global credit-related stresses.

Japanese wholesale prices rose 1.9% in the year to August and this did not have a significant impact on interest rate expectations with a strong conviction that the Bank of Japan will not increase interest rates next week. Abe’s resignation may increase the central bank’s freedom to operate slightly, although the bank will still be reluctant to act in the short term.


Sterling was unable to sustain gains above 2.0350 against the dollar on Wednesday and dipped sharply against the Euro with lows around 0.6840 as markets attempted to trigger stop losses near this level.

The latest labour-market data recorded an increase in headline earnings growth to 3.5% in July from 3.4% the previous month while there was a 4,200 decline in the unemployment claimant count. This was a smaller decline than seen in recent months, but the short-term policy impact will be limited.

In comments on the financial-market stresses, Bank of England Governor King stated that it was not the bank’s job to bailout investors and generally played down the potential impact of credit-market stresses.

The Governor also stated that the bank was in wait and see mode on interest rates and that the bank could adjust rates quickly if necessary. The remarks will reinforce speculation that interest rates have now peaked and this contributed to Sterling selling pressure during Wednesday.

Market interest rates remained at elevated levels on Wednesday and mortgage rates have edged higher which will maintain concerns over the UK housing sector. The more malign possibility remains that the sector will deteriorate sharply which would increase pressure for an interest rate cut. There will also be further fears that financial-sector weakness will undermine wider growth.

Swiss franc

The Swiss franc tested levels close to 1.1820 against the dollar on Wednesday before edging slightly weaker as US currency support levels held.

The franc was unable to make any impression on the Euro and weakened to 1.6475. The Swiss currency will remain vulnerable if there are sustained gains in
stock markets, but underlying risk aversion levels are likely to remain relatively high which should curb selling pressure.

The most likely outcome is that there will be a further 0.25% National
Bank interest rate increase on Thursday, although there is certainly the possibility that rates will be left on hold. A decision to leave rates at 2.50% would be likely to undermine the Swiss currency to some extent.

Australian dollar

The Australian dollar has continued to strengthen over the past 24 hours with gains to highs above 0.8420 against the US dollar.

The currency has continued to gain support from general US vulnerability while
commodity prices have remained firm. The latest Australian consumer confidence data was firm and the prospect of stable interest rates will maintain expectations of solid yield support for the Australian dollar if risk conditions stabilise. Underlying credit conditions will still represent important risks to the currency.