by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar remained under pressure on Thursday and weakened to fresh record lows just beyond 1.4180 against the Euro with the trade-weighted index at new 15-year lows.
The US new home sales data was weaker than expected with a 8.3% monthly drop to an annual rate of 795,000. There was a further rise in inventories over the month while prices also dipped. The sales decline will reinforce concerns over the housing sector, although the data was actually greeted with some relief as, ahead of the release, there were rumours of a 10% monthly decline. This relief helped the dollar stage a weak recovery to 1.4150.
Second-quarter GDP was revised down to an annual rate of 3.8% from 4.0% previously. The jobless claims was stronger than expected with a headline drop to 298,000 in the latest week which was the lowest figure since May. Although the data will remain volatile, the recent figures have not suggested heavy layoffs and this will also ensure strong interest in next week’s monthly payroll release. Strong data would curb expectations of further aggressive Federal Reserve interest rate cuts.
German unemployment fell by a further 50,000 in September which will help underpin near-term confidence over the economy, although employment is a backward-looking indicator. The September German consumer prices data also recorded a higher than expected 0.2% monthly rise to give a 2.5% annual increase. The data will reinforce inflation concerns within the German Bundesbank and the ECB will therefore be reluctant to abandon a tightening policy bias.
The dollar strengthened to 115.80 against the yen during Thursday and held relatively firm despite intermittent selling pressure while the Japanese currency was only able to secure a limited corrective recovery against the Euro.
Japanese investment funds worth around US$8.7bn are due to be issued this week and this will maintain the potential for overseas asset buying which will tend to curb yen support, especially if risk aversion continues to fade.
Bank of Japan member Suda stated that there would be risks of economic overheating if monetary tightening is delayed while policy should be adjusted in a pre-emptive and gradual fashion. Suda has had a significant impact in steering policy this year and the remarks will increase speculation over an interest rate increase during the fourth quarter.
The remarks will provide some yen backing given that markets are only putting a 10% chance on an October increase. The Tankan index, due for release on Monday, will be important for near-term yen direction.
Sterling pushed to highs around 2.0280 against the dollar on Thursday and also found further support weaker than 0.70 against the Euro, although it drifted from its best levels.
The latest Nationwide survey reported a 0.7% increase in house prices for September which will provide some immediate relief over near-term trends, especially there were fears that prices could fall. Sterling will still be at risk if forthcoming data suggests a significant slowdown, especially with reports that new house sales have dipped sharply over the past two weeks. August BBA mortgage approvals also fell by 10% over the month.
The latest CBI retail survey edged down to 12 in September from 15 which was the weakest level of the year, although the report did not suggest a rapid slowdown in spending.
The Swiss currency stayed relatively close to the 1.17 level against the dollar on Thursday. The US currency found support on dips and pushed to 1.1730 later in US trading.
The Swiss currency weakened against the Euro as global risk tolerances remained higher and the franc will tend to drift weaker if risk conditions remain more robust with a renewed flow of speculative funds into high-yield currencies. There is, however, a clear risk of complacency over the global risk situation.
The National Bank confirmed its 2007 growth forecasts at 2.5% growth and bank report indicated that business confidence was generally strong which will help underpin the Swiss currency.
The Australian dollar has continued to gain ground over the past 24 hours with highs above 0.8820 against the US currency, close to the 18-year highs seen in July.
The local currency has been underpinned by further confidence in high-yield instruments as risk tolerances have continued to improve. The impact has been magnified by stronger international interest in commodity currencies.
The Australian dollar resisted significant pressure for a correction and held close to 0.88 in US trading on Thursday.