by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Wednesday, March 12, 2008
The dollar was unable to sustain Tuesday’s gains during Wednesday and the Euro made several challenges on fresh record highs above 1.55. Despite some initial US currency support close to this level, the Euro pushed strongly to a fresh high around 1.5570 in New York trade. There were persistent reports of aggressive Middle East Euro buying during the session which helped to push the dollar weaker.
There were no significant US economic releases during the day, but a private report on consumer spending recorded a sharp monthly decline for February which will increase fears over the official sales report due for release on Thursday. A significant decline in sales would reinforce recession fears, especially if there is also an increase in jobless claims.
Overall confidence in the US economy and capital markets remains weak which is undermining the dollar. If the credit-market stresses do not ease and there is weak economic data, there will be renewed speculation over a 0.75% increase in interest rates.
Euro-group head Juncker stated that officials were very vigilant over exchange rates, but there was no intensification over rhetoric against Euro gains. Markets will still be cautious over selling the US currency aggressively at current levels given the risk of central bank protests and possible intervention to stabilise markets.
The US currency held firm against the yen in Asian trading on Wednesday, but was blocked close to the 103.50 level. There was evidence of increased exporter selling which restrained the dollar.
Domestically, the fourth-quarter GDP growth estimate was confirmed at 0.9%, which provided some relief, but the forward-looking data was less supportive. Consumer confidence was at a 5-year low while the Bank of Japan warned over downside risks to the economy. The government’s Bank of Japan Governor nominee Muto has been vetoed by the Upper House of parliament which will unsettle the yen to some extent, especially with current governor Fukui due to leave office next week.
Risk aversion increased again in New York and the dollar dipped to re-test levels below 102.0 against the yen with a retreat to 101.70. Markets will remain on alert for Finance Ministry comments on currencies overnight.
Sterling edged weaker against the Euro on Wednesday, although the overall performance was generally resilient with support close to the 0.7680 level. The UK secured renewed gains against the dollar with a move to highs above 2.0250 as the US currency came under fresh selling pressure.
The latest visible trade deficit was unchanged at GBP7.5bn for January which will not have a significant impact on the UK currency, although there may be some optimism that Sterling weakness over the past few months is having some beneficial impact.
The government reduced the GDP growth forecasts in the latest annual budget survey and there was an increase in the borrowing requirement, although the near-term impact will again be limited.
The Swiss franc found support close to 1.0350 against the dollar on Wednesday and strengthened back to levels beyond 1.02 in US trading. The franc also strengthened back to stronger than 1.58 against the Euro. US stock markets struggled to retain gains while persistent credit-related fears underpinned the Swiss currency.
The ZEW expectations index for the Swiss economy deteriorated further in February with a decline to -71.7 which will increase unease over economic trends.
The National Bank will hold its latest quarterly meeting on Thursday. The bank will be concerned both over the outlook for growth and inflation, in line with the difficulties faced by other major central banks. The most likely outcome is that the bank will leave interest rates on hold as it will not consider that a cut in rates is required at this time, although it could warn over franc strength.
The Australian dollar gained significant support from the Fed moves to boost liquidity and pushed to highs above the 0.93 level against the US dollar even though the US currency had a generally firm tone. The Australian dollar dipped in domestic trading on Wednesday and was battling to hold above the 0.93 level.
The latest Westpac consumer confidence index weakened to a 14-year low which will reinforce fears over a slowdown in the economy and there will be much greater doubt whether there will be any further Reserve Bank interest rate increase. Underlying risk aversion is hampering the Australian currency and it was held to around 0.9350 in New York despite the weaker US currency.