Daily currency analysis
The dollar found support weaker than the 1.47 level on Thursday and strengthened to around 1.4690 ahead of the US data. Stronger than expected US data pushed the US currency to highs around 1.4580 before a move back to 1.4625.
The US retail sales data was significantly stronger than expected with a headline 1.2% increase for November while there was a 1.8% underlying increase. Gasoline sales inflated the figure, but there was still a solid underlying increase. Sales are likely to be have been inflated by discounting and there is a risk that sales have effectively been brought forward which will undermine the December data.
Nevertheless, the sales data will ease immediate fears over the consumer sector which will provide some dollar support. Jobless claims edged lower to 337,000 in the latest week from 340,000 previously.
Headline producer prices rose a sharp 3.2% for November, the biggest increase for over 30 years. The underlying figure was held to 0.4%, but the consumer inflation data will be watched very closely on Friday. An elevated reading would raise inflation fears and make it more difficult for the Fed to consider a further cut in interest rates.
The revised Euro-zone inflation data will be watched closely on Friday and any upward revision would increase pressure for the ECB to tighten policy early in 2008 while a downward revision would provide some relief over short-term trends.
The yen strengthened back to 111.40 against the dollar in early Europe on Thursday. Markets took a more sceptical attitude over the central bank plans to inject liquidity into the markets and Asian stock markets fell which supported the Japanese currency.
The yen weakened back beyond the 112.0 level in US trading and, although this primarily reflected wider dollar strength rather than yen weakness, a rally on Wall Street also undermined the Japanese currency.
The yen is likely to gain support from increased levels of exporter selling above the 112.0 level, although risk conditions will tend to dominate.
The Tankan index will be watched closely overnight and a small headline drop is unlikely to have a significant impact while a sharp decline would unsettle the currency.
Sterling gained ground against the Euro during the day with a move to near 0.7160 as the Euro was subjected to wider corrective pressures. The UK currency hit resistance above 2.0450 against the dollar, but survived a test of support close to 2.0350.
The latest RICS house-price survey weakened to -40.6% in November from a revised -23.4% previously and was the weakest outcome for over two years. The data will reinforce fears over the UK housing sector and will damage underlying sentiment. The output component of the CBI index fell to a 23-month low which will reinforce expectations of a weaker trend, although the data did not suggest a severe slowdown.
The Bank of England will continue to face important policy dilemmas, especially as inflation expectations rose to 3.0% in the latest quarterly survey, the highest figure since the survey started in 1999.
The Swiss franc found support weaker than 1.67 against the Euro on Thursday, but failed to make much headway. The franc also weakened to lows near 1.1450 as the dollar rallied generally.
The Swiss National Bank held interest rates at 2.75% for December, the first time the bank had left rates on hold for two years. The bank increased its 2008 inflation forecast slightly, but Chairman Roth stated that there was no urgency over the situation and that the banking weakness would hurt the economy. The bank’s degree of comfort with the situation will not provide any significant near-term franc support.
Developments in global markets will remain under close scrutiny in the short term and the Swiss currency will tend to drift weaker if stock markets make further headway.
The Australian dollar held close to the 0.88 level in early Europe on Thursday. Domestically, there was a stronger than expected 52,600 increase in employment for November which will boost confidence in growth prospects, although the impact was offset by an increase in the unemployment rate to 4.5% from 4.3%.
Levels of risk aversion will remain dominant in the short term with trading conditions liable to remain erratic. A fall in global stock markets pushed the Australian dollar weaker and it dipped to below 0.8750 in New York as the US currency secured a wider recovery.