by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to fresh all-time lows around 1.4160 in Asian trading on Tuesday, but resisted further selling pressure in Europe. The dollar settled close to 1.4120 with the US currency still struggling to make any significant headway and unable to regain previous support levels as sentiment remains depressed.
The US currency secured some support after the Saudi Arabian authorities pledge to defend the existing peg with the dollar as this eased immediate fears over a policy change and a potential escalation in regional dollar selling.
The US durable goods orders data was weaker than expected with a 4.9% headline drop for August and a 1.8% underlying decline, but this followed a strong increase for July. The immediate impact will be limited, although the sharp drop in capital goods orders will cause some concern.
The new home sales data on Thursday will also be watched closely, although sentiment towards the housing sector is unlikely to change to any significant extent even if the data is stronger than expected.
German consumer confidence edged lower for September and there are still concerns over a slowdown in the Euro-zone economy. The German Finance Minister was confident that the Euro would not cause significant damage at current levels, but there were further protests over Euro strength from the French government.
The dollar managed to strengthen through the 115.0 level against the yen on Tuesday and this helped propel the US currency to highs around 115.80. The yen was undermined by a general improvement in risk tolerances which encouraged a flow of funds into high-yield currencies.
The Japanese trade surplus rose strongly to JPY743bn in August from JPY192bn the previous year as exports rose 14.5% over the year. The data will not have a significant near-term impact, but will provide some background yen support.
Markets are expecting a slightly weaker Tankan index when the report is released at the beginning of next week and a subdued reading for business confidence would dampen expectations of a Japanese interest rate increase. A surprise strengthening of the Tankan would give the Bank of Japan an opportunity to tighten policy and boost the yen.
Sterling weakened again in early Europe on Wednesday with a dip to lows around 2.01 against the dollar and 0.7025 against the Euro. The UK currency was able to stage some recovery later in the day.
The Bank of England announced that its emergency credit facility auction had not been used which boosted confidence that banking-sector conditions may be improving. It is, however, also the fact that using the facility would have damaged credibility which will have discouraged its use.
The central bank also reported that corporate credit conditions were tightening which will maintain fears over a slowdown in the economy. The latest UK housing data will be watched closely on Thursday for further evidence on underlying conditions with Sterling at risk if the data suggests a significant slowdown.
The current account deficit narrowed to GBP9.1bn in the third quarter from a revised GBP10.6bn previously as income flows were robust. The data will help ease immediate fears over the balance of payments situation even though the longer-term risks will continue.
The Swiss franc edged weaker against the Euro during the day as risk tolerances improved and the US currency also strengthened gradually against the dollar even though movements were subdued. There was evidence of selling pressure above 1.17.
The Swiss KOF index strengthened to 2.14 in September from an upwardly-revised 2.12 the previous month. This was above expectations and will provide some reassurance over the economy, especially as recent data has been disappointing.
The Australian dollar was able to sustain the bulk of the gains in Wednesday as US sentiment remained negative. The domestic developments have remained limited with the underlying yield considerations still providing firm support.
The weak US data has maintained expectations over further cuts in US interest rates which would strengthen the Australian dollar’s yield support. There has also been evidence of increased demand for high-yield currencies which boosted Australian dollar demand and allowed gains to the 0.8750 region.