Daily currency analysis
The dollar failed to strengthen through 1.46 against the Euro in European trading on Friday and weakened to test levels near 1.47. The Euro was again frustrated by the inability to break resistance levels and dipped again late in Europe.
The dollar gained some support from rumours of European bank debt write-downs as underlying risk aversion remained at elevated levels even though stock markets attempted to rally in early trade. Bush’s plans for US$140bn in support measures did not have a major impact, but could help the US secure increased capital inflows.
The University of Michigan consumer confidence index rose to 80.5 in January from a final 75.5 the previous month which will help stabilise sentiment towards the US economy to some extent, although recession fears will certainly persist.
Fed Governor Lacker stated that growth forecasts had been downgraded since the December employment report. He stated that he would be more willing to consider a further cut in interest rates even though there are still significant inflation concerns which should not be ignored. The overall evidence suggest that the Fed will cut aggressively at the January meeting, although this is more than discounted in the futures markets which will limit the negative dollar impact.
ECB President Trichet warned over potential inflation risks in comments on Friday, but the Euro will still be unsettled by speculation that growth will slow sharply.
The yen initially remained strong in Asian trading on Friday before weakening back towards 107.10 as the Nikkei index rebounded into positive territory. The yen also failed to hold gains beyond 156.0 against the Euro, but the dollar failed to hold above the 107.30 level and was below 107 in US trading.
The latest domestic data was mixed with a drop in department-store sales offset by an unexpected recovery in the tertiary index. The latest capital account data recorded net outflows of capital as Japanese investors pushed funds into overseas assets.
The attitude of Japanese investors will continue to have an important yen impact. Underlying caution over the global economy should provide underlying support as yen moves remain correlated with trends in international stock markets.
Sterling initially held steady in early European trading on Friday before weakening sharply after the UK data. From highs above 1.97, the UK currency weakened to lows near 1.9510 before stabilising. Sterling also weakened back towards 0.7470 against the Euro.
There was a 0.4% drop in retail sales volumes for December compared with expectations of a small increase and this cut annual growth to 2.7% from 4.4%. There was also a 1.2% drop in prices over the year which reinforced expectations that consumer spending was weakening steadily.
The sales data will maintain pressure for the Bank of England to cut interest rates again in the near term and this will undermine Sterling support, although conditions will be volatile given fluctuating confidence in the major economies.
The Swiss currency again found support weaker than the 1.1050 level against the dollar on Friday and strengthened back to just beyond the 1.10 level in US trade. After finding support close to 1.6175, the franc also strengthened through the 1.61 level against the Euro.
The underlying degree of support was illustrated by the gains at a time when major global stock markets were only slightly weaker and this suggests important underlying demand for the Swiss currency.
The Australian dollar weakened to lows near 0.8700 in local trading on Friday as equity markets fell sharply. There was, however, support close to this level and a solid recovery for the Nikkei index allowed the currency to rally back towards the 0.88 level in early Europe. Risk conditions are liable to dominate in the short term with the Australian dollar at risk when fears over the global economy increase.
Domestically, expectations of a February interest rate increase had stated to fade, but speculation was revised by central bank comments as Reserve Bank Governor Stevens stated that inflation is uncomfortably high in the short term. The Australian dollar was still struggling to sustain gains as risk aversion remained high.