by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was unable to break 1.4050 against the Euro on Tuesday and drifted weaker ahead of the US economic releases. The US currency weakened to fresh record lows beyond 1.4150 after the data, but the Euro struggled to extend the gains as it remained over-bought.
The US economic data remained generally weak with existing home sales dropping to an annual rate of 5.50mn for August from 5.75mn the previous month. This was the lowest level for five years while there was a further rise in inventories which will undermine prospects for a recovery. Prices held broadly steady for the month while the Standard & Poor’s house prices index for major cities fell 3.9% in the year to July.
Consumer confidence also fell further to 99.8 in September from a revised 105.6 in August, although the Richmond Fed manufacturing index rose strongly for the month. Fears over a sustained downturn in the housing and consumer sectors will continue to unsettle the dollar in the short term.
The German IFO index fell to 104.2 in September from 105.8 the previous month which will reinforce speculation over a sharp slowdown in the Euro-zone economy. There have been mixed comments from ECB officials with Garganas, for example stating that policy was still accommodative. He also stated that there were increased risks to the economy and markets will not be looking for interest rates to increase again in the short term. Reports of US$2.4bn of losses at Deutsche Bank unsettled the Euro to some extent.
Yen
The dollar weakened to 114.0 against the yen on Tuesday. There was evidence of renewed caution over credit-related stresses and increased risk aversion, especially after the Deutsche Bank loss reports. These uncertainties discouraged yen selling with the dollar also weakening after the US data.
The US currency found support close to 114.0 and strengthened back to 114.50 later in US trading as the yen also faltered against the Euro with a renewed recovery in risk tolerances.
The Japanese corporate services price index rose 1.0% in the year to August which failed to have a significant impact. The Bank of Japan minutes from August were tougher than expected with several members stating that rates should be increased as soon as possible. This stance will provide some yen support with speculation that the bank could still tighten late this year.
Sterling
Sterling weakened sharply in early Europe on Tuesday with losses to below 2.01 against the dollar and a further test of support near 0.70 against the Euro. The UK currency recovered some ground in US trading, especially against the dollar with a move back to 2.02.
The UK currency was also undermined by reports that the UK bank deposit protection fund had assets worth less that GBP5mn which would leave it very exposed if there was a significant banking-sector casualty. The IMF also warned over the risks to sub-prime lending in the UK.
There is likely to be a further downgrading of interest rate expectations which will tend to undermine Sterling in the medium term even if the currency proves resilient in the short term.
Swiss franc
The Swiss currency strengthened to 1.6470 against the Euro on Tuesday, but was unable to sustain the gains and weakened back to 1.65 as global stock markets stabilised. The Swiss franc also strengthened to 1.1640 against the dollar before a retreat to 1.1670 later in US trading.
The Swiss consumption index weakened to 1.93 in August from 2.26 the previous month which will reinforce expectations that the economy is slowing and the KOF index will be watched closely on Wednesday. A sharp drop for the month would reinforce expectations that the National Bank will not increase interest rates again in December which will tend to lessen franc demand.
Australian dollar
The Australian dollar was unable to push above the 0.8700 level against the dollar and weakened back to near 0.8630 in local trading on Tuesday. There were no major domestic developments with yield factors still providing underlying support. There was less confidence in global credit conditions and this created some caution over high-yield currencies with some scaling back of carry-trade positions.
