Daily currency analysis
The Euro pushed above the 1.44 level against the dollar in early Europe on Friday, but failed to sustain the gains and consolidated around 1.4360 in New York. Trading volumes declined ahead of the weekend and the US currency held generally firm.
There was a bigger than expected increase in personal spending for November with the 1.1% monthly increase reinforcing the message of the retail sales data reported earlier in December. The University of Michigan consumer confidence index edged stronger to 75.5 in December from 74.5 previously.
Markets are also maintaining a focus on inflation indicators following the higher than expected US consumer inflation data released last week. The core monthly PCE inflation data was in line with expectations at 0.2%. The annual rate, however, increased to 2.2% compared with expectations of a 2.0% figure. The Fed has an unofficial 2.0% ceiling and the increase above this level will certainly create some unease within the Federal Reserve. Following the Friday spending and inflation data, expectations of a January interest rate cut edged down slightly which will provide some further near-term dollar support.
The Euro-zone industrial orders data was stronger than expected with a 2.5% monthly increase, but underlying confidence in Euro-zone growth prospects has weakened which will maintain the threat of profit taking on Euro positions. Trading volumes will be low next week which will maintain the threat of erratic trading.
The Japanese yen remained on the defensive on Friday with fresh six-week lows against the dollar beyond the 114.0 level while the Japanese currency also weakened against the Euro.
The yen was undermined by strong gains for global stock markets while an announcement of fresh direct investment into the US banking sector also eased immediate credit fears.
The Japanese growth fears will persist and there has been some speculation that the Bank of Japan could actually be forced to cut interest rates next year rather than consider a further increase.
These concerns will curb underlying yen buying even though the adjustment of global holdings and liquidity factors will remain the dominant currency-market influence.
Sterling found some further support just above 1.98 against the dollar on Friday, but there was selling pressure on an approach to 1.99 with renewed losses in New York. The UK currency also weakened to record lows against the Euro at just beyond 0.7255 before a marginal corrective recovery.
The latest UK retail sales data was slightly above expectations with a 0.4% increase for November with the annual increase holding steady at 4.4% which will ease immediate pessimism. Overall confidence is, however, likely to remain weak, especially as the increase in sales was driven by price discounting rather than strong demand with store sales particularly weak.
Services-sector growth also slowed in the three months to October while there was a further decline in consumer confidence to -14 in December from -10 previously and this was the lowest reading for 16 years. Overall confidence in the economy is liable to deteriorate further in the short term which will tend to keep Sterling on the defensive with expectations of a further Bank of England interest rate cut at the January meeting.
The Swiss currency held close to 1.66 against the Euro on Friday while the franc also consolidated around 1.1550 against the dollar. The Swiss franc held up better than the Japanese yen over the day which suggests some residual demand for the currency.
The Swiss franc will still tend to weaken if there are sustained gains for global stock markets, but fundamental strength will help protect the currency.
There were further Australian dollar gains in local trading on Friday with a move back towards 0.8670. Confidence in the domestic economy is still firm at this stage which is providing Australian dollar support. This backing will continue to be offset by fears over global credit-related fears.
Expectations of weaker global growth will not provide a strong backdrop for the Australian currency even if stock market gains provide further near-term support.
A temporary easing of credit-related stresses pushed the Australian dollar to 0.8695, but it drifted back towards 0.8650 later in New York.