Daily currency analysis
The dollar failed to make further progress against the Euro on Wednesday and weakened back towards the 1.45 level. The US currency was unable to secure a significant recovery on Thursday and weakened to lows around 1.4575 in New York.
The US data was weaker than expected with the Case-Shiller house price index falling 6.1% in the year to October. Many cities registered record price declines over the year which maintained expectations of further major difficulties during 2008. The increase in US durable goods orders was held to 0.1% for November while core orders fell by a further 0.7% over the month.
There were generally disappointing retail sales reports for the first three weeks of December, although consumer confidence edged stronger for the month. In this environment, the dollar will find it difficult to secure much support on growth grounds. It would, however, be dangerous to read too much into currency moves this week given the lack of liquidity while capital flows into the US will provide some important underlying backing.
Institutions will be looking to maintain Euro weightings into the year-end period which should provide further immediate Euro support, especially if there is a weak US home sales report on Friday. Unease over the Euro-zone economic trends should still limit the potential for aggressive currency buying.
After losses on Wednesday, the yen extended losses in early European trading on Thursday following a weak report on housing starts. The yen dipped to lows beyond 114.50 against the dollar and 166.0 against the Euro, but secured some respite after the reported death of Pakistan opposition leader Bhutto.
The Bank of Japan took a generally downbeat stance on economic prospects in the latest central bank minutes with warnings over the impact of high oil prices and a weaker US economy.
There has been further speculation that the Bank of Japan could move towards a cut in interest rates in 2008. Although this remains unlikely, yield support will remain very weak which will maintain yen vulnerability on yield grounds. The series of Japanese data releases on Thursday should not have a major currency impact.
Sustained gains for global equity markets would tend to weaken the yen, although caution is required as any short-term gains could be related to window dressing ahead of the year-end with the risk of a sharp sell-off early in 2008.
Sterling found support below 1.98 against the dollar on Wednesday and pushed back to highs around 1.9950 on Thursday as the US currency retreated. Sterling was unable to gain any sustained relief against the Euro and weakened to new record lows beyond 0.73.
The anecdotal evidence on retail spending trends will be watched very closely and signs of strong initial buying in the sales period will provide some Sterling support. Demand for high-yield currencies will also provide some immediate UK currency support as carry trades enjoy near-term popularity, although durable gains will be more difficult to achieve.
Fears over the 2008 outlook will still tend to maintain underlying Sterling vulnerability with fears over the housing sector continuing. Thursday's data provided some immediate relief with BBA mortgage approvals rising to 44,800 in November from 44,300 previously while third-quarter equity withdrawal held above the GBP10.0bn level. The level of approvals was still substantially down from a figure above 76,000 in November 2006.
The Swiss currency found further support above the 1.1550 level against the dollar and strengthened to near 1.1420 in early US trading on Thursday. The franc also found some support close to 1.6680 against the Euro although gains were limited.
The franc will tend to lose ground if there are sustained capital flows into carry trades with fresh demand for high-yield instruments. Trading volumes will remain at low levels over the next two days which could trigger erratic trading as currency weightings are adjusted before the end of 2007. Doubts over Euro-zone strength should provide some franc protection against the Euro.
The Australian dollar has retained a firmer tone with a challenge on levels above 0.8750 in Asian trading on Thursday. The local currency has gained support on yield grounds with markets pricing in around a 50% chance of a February interest rate increase.
There has also been increased confidence in carry trades which has reinforced the Australian dollar's appeal, especially with commodity prices strengthening after China lifted import restrictions. The Australian dollar will gain further near-term support on high-yield currency demand, although there is the growing risk of complacency over the situation.