by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to a fresh record low near 1.4120 against the Euro on Friday before correcting back to highs around 1.4050 early in US trading.
There were no major US economic developments or data releases during the day and the US dollar consolidated around 1.4080 after heavy losses over the week as a whole Persistent weak sentiment preventing more significant dollar gains.
The dollar will continue to be unsettled by yield considerations with markets estimating the chances of another Federal Reserve interest rate cut in October at around 70%. The US housing data will be watched closely next week and, although the data is liable to remain weak, any recovery could trigger a significant adjustment in expectations which would underpin the dollar.
The Euro-zone PMI manufacturing index fell to 53.2 in September from 54.3 which does suggest a significant slowdown in the economy, especially after the weak German ZEW survey this week. The services sector PMI also fell more sharply to 54.0 from 58.0 the previous month with the composite index at a two-year low. The weaker data will reinforce expectations of a significant slowdown in the Euro-zone and markets are continuing to move away from expecting further interest rate increases.
There were comments from ECB council member Bini-Smaghi on Friday that the bank would intervene in the currency markets when appropriate. The ECB is unlikely to take any action in the very short term, but the remarks will increase fears over intervention and will curb aggressive Euro buying. There will also be speculation that the ECB will look to push for stronger Asian currencies to alleviate upward pressure on the Euro.
The yen hit tough resistance close to 114.0 against the dollar on Friday and weakened to 115.80 as a dollar rally coincided with renewed yen selling pressure.
The scope for near-term yen gains will continue to be undermined by rising risk tolerances and gains for high-yield currencies. Option volatility prices have fallen to the lowest level for six week which increased yen selling and the Japanese currency also weakened to beyond 162.0 against the Euro which was the strongest Euro level since the second week of August.
High oil prices will also tend to weaken the Japanese currency, but exporter selling is liable to continue above the 116.0 level.
The latest capital account data also reported net flows back to Japan due to caution over investing overseas and this should help protect the Japanese currency.
Sterling found support weaker than 0.70 against the Euro on Friday in a correction from recent sharp losses and strengthened back towards 0.6970. The UK currency also pushed to highs just above 2.02 against the dollar.
The general recovery in risk appetite helped support Sterling during the day while the high level of oil prices also provided some underlying backing with no economic data releases.
There were no negative developments surrounding the UK banking sector which helped underpin sentiment as markets hoped that the stresses were easing. The UK currency was still undermined to some extent by the downgrading of interest rate expectations.
The dollar found support below the 1.17 level against the franc, but was unable to retake the 1.18 level and drifted back to 1.1730. The Swiss franc was trapped weaker than 1.65 against the Euro.
National Bank Chairman Roth stated that the bank was now in a pause position and this will reinforce expectations that interest rates will not be increased further at this stage. The potential negative impact on the franc will be offset by the fact that rate expectations are being downgraded elsewhere.
The Australian dollar has continued to take advantage of US dollar vulnerability with gains to two-month highs around 0.87 in local trading on Friday. The domestic yield support remains intact and the Australian dollar has secured additional support from the gains in gold prices while the wider CRB commodity price index has strengthened to a 12-month high.
The currency was vulnerable to a correction following the recent strong advance and dipped to lows near 0.86 in US trading before settling close to 0.8650.