by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Tuesday, March 25, 2008
The dollar weakened sharply in Asian trading on Tuesday with a renewed retreat to beyond the 1.55 level against the Euro and it was unable to secure any significant recovery. Renewed fears over the economy pushed the currency to lows around 1.5620 level in New York trading.
US consumer confidence weakened further in March to 64.5 from a revised 76.5 the previous month. This was the weakest headline reading for five years while the expectations component fell even further to the lowest level for 35 years. The Case-Shiller house-price index recorded a drop in prices of 10.7% in the year to January from a revised 9.0% previously.
The depressed confidence reading, allied with lower house prices, will reinforce fears over the outlook for consumer spending. The manufacturing data offered some slight respite with a recovery in the Richmond Fed index, although other components were weaker. The durable goods orders data will be watched closely on Wednesday and a rebound would provide some dollar support, but the underlying data flow is liable to remain subdued at best.
After no significant data releases on Tuesday, the latest German IFO report will be watched closely on Wednesday and another resilient reading would underpin near-term Euro confidence. The ECB added additional liquidity to ease money-market trends on Tuesday, but markets moved closer to pricing out an interest rate cut this year. Any string of weak data releases would now be likely to trigger a significant shift in expectations which would damage the Euro.
The Bank of Japan and Finance Ministry both warned over domestic economic trends on Tuesday. The dollar, however, hit tough resistance close to the 101.00 level against the yen on increased exporter selling and reported option-barrier protection. The US currency weakened back towards 100.20 as European markets resumed trading after the holidays.
The US currency found support below the 100 level, but struggled to make much headway as underlying sentiment was weaker.
Risk aversion was still generally lower which curbed yen buying support. Capital flows will be watched very closely over the next few days due to the possibility of last-minute capital repatriation ahead of the fiscal year-end. Strong repatriation flows would provide important near-term yen support.
Sterling was able to resist a renewed test of support below 1.98 against the dollar on Tuesday and pushed to high just above the 2.00 level in New York. The UK currency settled close to 0.78 against the Euro after finding support near 0.7830.
There were no significant domestic developments during the day with Sterling still gaining some support from the recent run of more favourable data. The Bank of England will give evidence to the UK Treasury select committee on Wednesday and markets will look closely for any hints on near-term interest rate policy. A robust stance on inflation would underpin near-term Sterling support.
UK money markets remained at elevated levels on Tuesday which will reinforce pressure on the Bank of England to sanction an early cut in interest rates. Sterling is, however, securing some short-term benefit from the improvement in risk conditions.
The dollar was unable to hold above the 1.02 level on Tuesday and weakened back to lows below 1.01 in US trade. The franc had a slightly weaker tone against the Euro, but found support beyond the 1.5750 level.
The degrees of fear remained at a reduced level in the market which curbed defensive franc buying, but the Swiss currency was still able to resist heavy selling pressure as underlying confidence remained very fragile. The franc gained some renewed support from generally weak US data releases.
The UBS consumption index strengthened for March which will provide some support to domestic confidence.
There were Australian dollar gains to near 0.9150 in local trading on Tuesday. The currency moves were still being dominated by levels of risk aversion and commodity price trends. Commodity prices recovered to some extent after heavy losses last week and there was also an improvement in risk appetite as global equity and credit markets rallied. The more optimistic tone may be sustainable in the near term which will tend to support the Australian currency, although underlying fears will persist.
Domestically, there will be less confidence in a further interest rate increase which will curb buying support, although overall yield differentials relative to the US dollar are still very favourable. The Australian currency was able to hold above 0.9150 against the US currency in New York trading.