EUR/USD

The US currency secured limited net gains in Asia on Tuesday before consolidating around 1.45 in early Europe.

The Greek government announced that it would launch a fiscal stability plan on Wednesday, designed to cut the budget deficit to around 3% of GDP in three years time. A credible plan could boost sentiment surrounding the weaker Euro-zone members to some extent, but underlying confidence will still be fragile and fears will continue to limit the scope for Euro support.

China’s increase in reserve requirements, allied with weaker than expected earnings from US company Alcoa unsettled the Euro to some extent as risk appetite deteriorated, although the impact was measured as the dollar found it difficult to gain net support.

The US trade deficit was wider than expected at US$36.4bn for November from a revised US$33.2bn the previous month. Imports rose strongly, primarily due to rising oil imports, although there was also a robust export performance which will increase optimism over the economy to some extent.

The US dollar was unable to strengthen through the 1.4450 level against the Euro and settled near 1.45 later in US trading with diminished expectations of Fed rate increases likely to remain a negative influence.

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Source: VantagePoint Intermarket Analysis Software

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Yen

In comments on Tuesday an official of China’s sovereign wealth fund stated that the dollar had hit bottom and had little room to decline while the yen was likely to weaken. These comments triggered a spike higher in the dollar/yen rate, especially as underlying confidence in the yen is still broadly weak.

Finance Minister Kan stated that a stable currency market was needed and markets will remain on high alert over comments from the government. Some caution over global economic prospects helped protect the Japanese currency from heavy selling pressure and the dollar was unable to push back above the 92.50 level.

China continued to have an important influence on the Japanese currency during the day and an increase in reserve requirements triggered a sharp downward move in the dollar against the yen. With risk appetite also weaker, the dollar weakened to three-week lows near 90.70 while the yen also gained significant ground on the crosses.

Sterling

The latest UK economic data was mixed with a firm figure for retail sales according to the BRC, but the latest RICS house-price survey recorded a slight deterioration for the first time for 10 months. Sterling initially fluctuated around 1.61 against the dollar during Tuesday as US moves tended to dominate.

A firmer than expected DCLG house-price index, allied with a reported increase in exports in the latest trade data,  provided some degree of support for Sterling.

The UK currency remained broadly resilient during the day as the Euro was again unable to hold above the 0.90 level against the UK currency. Sterling found support below 1.61 against the dollar and edged stronger to 1.6170 later in the US session.

Overall confidence in the economy will still be weak which should limit the scope for Sterling gains.

Swiss franc

The dollar found support below 1.0150 against the franc on Tuesday, but was unable to make much headway and was blocked just above the 1.02 level. The Euro found support below 1.4750 against the franc, but advances quickly met selling pressure as confidence remained weak.

There was no evidence of National Bank intervention during the day, but markets will remain on high alert over the possibility.

The Swiss currency will tend to gain some support if there is a sustained deterioration in global risk appetite.

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Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar maintained a firm tone on Monday, but was unable to extend gains and dipped back below the 0.93 level against the US dollar on Tuesday. The latest housing-finance data was weaker than expected which will cause some doubts over economic trends, although the immediate impact is likely to be limited.

China’s decision to increase reserve requirements had an important negative impact both on commodities and risk appetite and the combination pushed the Australian dollar to lows below the 0.92 level against the US currency. The near-term performance will remain correlated significantly with trends in commodity prices and risk appetite.