by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar came under further pressure in European trading on Thursday, dropping through the 1.40 support level. Stop-loss buying helping to propel the Euro to record highs around 1.4095 before a slight correction.The US currency was undermined in part by rumours that Saudi Arabia will drop its peg to the dollar after its monetary authority failed to match the Federal Reserve’s interest rate cut. These rumours also increased fears over underlying central bank reserve diversification away from the US dollar as sentiment remained firmly negative.
The latest US jobless claims data recorded a decline to 311,000 in the latest week from 320,000 previously which will ease short-term fears over a strong increase in layoffs. The Philadelphia Fed index rose firmly to 10.9 in September from 0.0 the previous month with solid readings across the main components. The main focus will still tend to focus on the housing and consumer spending and Fed Chairman Bernanke warned that sub-prime delinquencies would get worse.
Evidence of a firm manufacturing sector would still provide some relief with the US gaining from a strong competitive position.French President Sarkozy stated on Thursday that he had a problem with the ECB not cutting interest rates. He also stated that he does not believe in a weak Euro, but protests against currency strength are liable to increase, especially if the Euro continues to advance.
Yen
The dollar was unable to sustain a position above the 116.0 level against the yen on Thursday and weakened sharply to lows near 114.00 before a tentative recovery to 114.50. The yen was able to hold its ground against the Euro even with the Euro generally strong.
There has also been a significant de-coupling of the yen from Wall Street trends with the dollar unable to gain any support from US stock market strength, in contrast to the pattern seen over the past month. This illustrates the decline in dollar confidence, but the yen’s ability to outperform the Euro was also a potentially important development and suggests increased underlying yen demand.
Sterling
Sterling again found support below the 2.00 level against the dollar on Thursday and strengthened to highs near 2.0150 before a retreat in choppy trading. After testing 18-month lows beyond 0.70 against the Euro, Sterling secured a tentative recovery to 0.6990 later in US trading.
The monthly retail sales data was stronger than expected with a 0.6% increase in volumes for August to give a 4.9% annual increase. The headline figure will ease immediate fears over a sharp slowdown in spending. The increase was, however, again boosted by price discounting which will maintain underlying fears over a slowdown in consumer demand and wider economic deterioration.
There is liable to be a further downgrading of interest rate expectations in the short term with some speculation over a cut before the end of 2007. The Bank of England testimony to parliament did not have a major impact, but confidence in the financial sector will remain weaker in the short term.
Swiss franc
The Swiss currency found support beyond the 1.65 level against the Euro on Thursday and strengthened back 1.6470. The dollar finally lost support close to the 1.18 level against the franc, weakening to lows below 1.17 before a fragile recovery. This was the weakest dollar level since the second quarter of 2005.
Producer prices rose 0.3% in August to give a 2.7% annual increase. The data will prevent any degree of complacency on inflation and interest rates by the National Bank.
Risk tolerances will remain important in the short term and a further easing of global credit stresses would continue to undermine near-term Swiss currency demand. The overall performance on Thursday suggests that the franc will be resilient to any significant selling pressure.
Australian dollar
The Australian dollar has continued to take advantage of US dollar vulnerability with a move to a six-week high above 0.8650 against the US dollar on Thursday. The currency edged lower later in US trading with evidence of profit taking after recent strong gains.
The currency has also drawn support from an improvement in risk tolerances and robust metals prices. Confidence will remain firmer in the short term, but it will be very dangerous to assume that markets are back to normal. There will also be continuing pressure for Asian monetary tightening which will tend to undermine commodity prices in the medium term
