Daily currency analysis
The dollar failed to sustain gains through 1.46 against the Euro on Thursday and weakened to test support levels beyond the 1.47 level. The pattern of choppy trading persisted with the US currency pushing back to 1.4650 later in New York. The dollar is continuing to gain some net defensive support when Wall Street comes under selling pressure. President Bush’s plans for a temporary fiscal stimulus also provided some limited support to the currency.
The US data was generally weaker than expected and added to fears over the US economy. Housing starts fell to an annual rate of 1.01mn in December from 1.17mn previously which was a fresh 16-year low while building permits fell to 1.07mn.
The Philadelphia Fed index also fell sharply to -20.9 in January from -1.6 the previous month while there was an increase in the prices components. The latest jobless claims data did, however, record a decline to 301,000 which should provide some reassurance over the labour market.
Markets remain convinced that the Federal Reserve will cut interest rates by at least 0.50% in January and the latest comments from Fed Chairman Bernanke did little to dispel these expectations. The dollar will remain vulnerable on yield grounds, but global growth fears will continue to provide some important protection.
Following weaker than expected comments from ECB officials on Wednesday, the comments on Thursday were generally tougher and illustrates the fact that the ECB at this stage does not want rate cut expectations to take hold in the markets.
The yen was unable to sustain gains beyond 107.0 in Asian trading on Thursday as market fears eased, at least temporarily. A solid dollar performance pushed the yen weaker to 107.70 in European trade.
The Nikkei index regained ground after five successive declines which eased immediate yen demand. Markets were still very cautious with some Japanese reluctance to push funds into high-yield overseas assets while existing short yen positions were scaled back. Underlying fears over US and European growth trends should also curb selling pressure on the yen.
Chinese growth is still robust and the central bank move to tighten reserve requirements again will provide some support to the Japanese currency, although global risk conditions should continue to dominate moves. A renewed decline on Wall Street pushed the yen stronger to 106.75 in New York.
The UK currency remained more resilient on Thursday, pushing to highs near 1.98 against the dollar and 0.7420 against the Euro. The UK currency suffered a partial correction in US trading, but still secured net gains over the day.
There were mixed comments from Bank of Deputy Governor Gieve on Thursday. While he expressed considerable unease over the growth outlook, Gieve also warned that there would be significant upward pressure on inflation over the next few months.
There will still be strong confidence that interest rates will be cut in February, but with some increased doubts whether the bank will be able to cut aggressively.
Overall, a combination of higher inflation and weaker growth will not be a positive combination for Sterling in the medium term. Friday’s retail sales data will be watched closely for evidence on consumer spending.
The Swiss currency continued to correct weaker on Thursday after very strong gains over the previous few days. The franc weakened to lows near 1.6180 against the Euro and 1.1080 against the dollar, but recovered ground in US trading as global stock markets came under renewed pressure.
The latest Swiss ZEW economic expectations index was at the lowest level since its launch in 2006 which suggests a slowdown in the economy, although risk conditions will tend to dominate in the short term.
Unease over global economic and stock market trends should limit any selling pressure on the Swiss currency.
The Australian dollar pushed higher in local trading on Thursday as fear eased slightly. Domestically, the December employment increase was close to expectations at 20,100 while the unemployment rate fell to 4.3% from 4.5%. The data will provide some reassurance over economic trends and will maintain the possibility of a further interest rate increase.
Global risk conditions will remain important and the Australian dollar will find it difficult to gain strong support, especially as there will be increased fears over a downturn in the global economy which would undermine commodity prices. The Australian dollar failed to hold gains above 0.8850 against the US currency and dipped back to below 0.88 as Wall Street came under renewed pressure.