by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Friday, May 9, 2008
The dollar was unable to sustain gains through the 1.54 level against the Euro on Friday and drifted weaker to lows around 1.5490 with the US currency at the weaker end of this range in New York.
The US currency had gained support earlier in the week from the expectations of a softening of the ECB stance and the US currency was still suffering from some reassessment of the situation following Thursday’s council meeting. The Euro will still be hampered by expectations of a sharp slowdown in Euro-zone growth and markets will stay on high alert next week for any evidence of further deterioration in the Euro area. The ECB reported that lending standards had generally tightened during the first quarter, notably in the business sector, which will reinforce expectations of weaker growth.
The US currency was also unsettled to some extent by an increase in risk aversion following weaker than expected results from US insurer AIG released after the market close on Thursday. Wider than expected losses increased fears that there were still major stresses in the economy and the risk of further debt write-downs. Oil prices also pushed to fresh record high during the day which unsettled the dollar.
The US trade deficit fell to US$58.2bn in March from a revised US$61.7bn the previous month. There was a drop in oil imports over the month despite the high level of prices while there was also a drop in exports. The deficit decline will underpin longer-term dollar sentiment to some extent, but the impact will be offset by the fact that lower imports indicate weak demand within the economy.
The Nikkei index weakened on Friday following Toyota’s results and overall level of risk aversion were generally higher which provided some support for the yen. There was less global confidence over carry trades which also triggered a move back into the Japanese currency.
Japanese leading indicators remained weak for the latest month and there is also further evidence of strains within the export sector. These two factor combined are likely to limit Japanese currency demand.
Nevertheless, a sharp dip in equity markets pushed the dollar down to 103.00 in European trading and the US currency was trapped close to this level in New York as credit fears persisted. The dollar will also struggle in the short term if wider volatility levels increase.
Sterling remained under pressure on Friday with losses to lows around 0.7940 against the Euro. The UK currency also dipped below support levels at 1.95 against the dollar before pushing back to just above this level later in New York.
There were no significant domestic indicators with Sterling undermined to some extent by a drop in risk appetite over the day as investors shifted into more defensive assets.
The UK inflation data will be watched closely on Monday and Tuesday next week for further evidence on inflation trends within the UK economy and the potential for a near-term cut in interest rates. High inflation data would provide some degree of Sterling support. The latest trade data will also be watched closely on Monday to assess whether the weaker currency is providing any significant support to exports.
The Swiss currency was generally firm on Friday with gains to a peak around 1.6065 against the Euro while the dollar also weakened to below 1.04 against the franc.
The renewed increase in risk aversion provided some support to the Swiss currency during the day as European equity markets came under selling pressure. There was some correction in US trading, but the franc retained a firm tone.
Overall credit-related fears should still be running at a reduced level which will limit strong demand for the Swiss currency. There is also the potential for further unease over the Swiss banking sector which will hamper the currency.
The Australian dollar found support close to the 0.94 level against the US currency on Thursday, but was unable to make significant headway.
The domestic influences were limited on Friday with the currency holding close to 0.94 against the US dollar while there were net losses on the crosses. Commodity prices were generally firm, but the potential positive impact was offset by a decline in risk appetite as the yen strengthened.