Dollar Continued to Gain Defensive Support

EUR/USD

The Euro corrected stronger to a peak above 1.2920 against the dollar in early Europe on Thursday, but was unable to sustain the advance and weakened to test support levels below 1.28 ahead of the US open.

There was a further widening in Euro-zone bond spreads during the day which tended to revive fears over the sovereign-debt risk. Confidence in the Euro area was also damaged by a weaker than expected Greek GDP data as there was a further 1.5% quarterly contraction in the economy. Persistent recession in the weaker economies will maintain fears that the current policies and structure will prove to be unsustainable.

The US jobless claims data was again weaker than expected with an increase to 484,000 in the latest reporting week from a revised 482,000 previously. Claims close to the 500,000 level are certainly an indicator of a generally fragile labour market and there will be further fears that the economy is slowing. Underlying confidence in the US fundamentals will remain extremely fragile, especially with government-debt fears escalating. A firmer retail sales figure on Friday would be likely to provide only limited relief in the current environment.

Trends in risk appetite will remain important and the dollar continued to gain defensive support from a lack of confidence in the global growth environment. The Euro re-tested 3-week lows below 1.28 before consolidating just above this level as Wall Street stabilised.

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Yen

The potential for intervention remained a key focus on Thursday, especially with the Nikkei index falling to 2010 lows on fears over deflation and a negative impact on the Japanese industrial sector. There were reports that Prime Minister Kan had described the sudden exchange rate moves as rough and there were meetings between Bank of Japan and Finance Ministry officials.

The dollar found further support below 85 against the yen on rumours of rate checking by the central bank, but gains were limited as the US currency was hampered by declining yields and the yen gained support from a lack of confidence in the global economy.

The yen came under more sustained pressure later in the day, especially with the Bank of Japan governor’s statement reinforcing speculation that there could be intervention to weaken the currency. The dollar pushed to a high near 86 with markets unwilling at this stage to challenge official resolve.

Sterling

Sterling recovered to a high just above 1.57 against the dollar in early Europe primarily as a function of a wider US currency correction.

Underlying confidence in the UK economy remained weaker following recent economic data and a generally downbeat assessment by the Bank of England. Sterling was also undermined to some extent by a deterioration in risk conditions and renewed unease over sovereign credit ratings.

Confidence will remain finely balanced between optimism that aggressive action to curb the government budget deficit will improve the structural outlook and fears that the economy will continue to deteriorate on a lack of spending power. The net risks suggest growth fears may become increasingly important.

The lack of confidence pushed Sterling to lows below 1.56 against the dollar with further selling pressure stifled by reports of central bank buying interest at lower levels.  

Swiss franc

The dollar was unable to make a renewed break above the 1.06 level against the franc on Thursday and dipped to lows near 1.05 later in the US session. Movements in the Euro/Swiss cross continued to have an important impact as the Euro weakened sharply again to lows below 1.35.

The Swiss currency continued to gain support from a lack of confidence in the global economy. Renewed fears over widening Euro-zone bond spreads will also tend to maintain defensive demand for the franc.

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Australian dollar

The higher than expected unemployment rate of 5.3% from 5.1% previously had some impact in undermining the Australian currency on Thursday, but there was a recovery back to just above 0.90 against the US dollar in Europe as the solid increase in employment helped lessen the negative impact.

The more cautious tone towards the global economy is likely to continue in the short term and this will be a negative factor for the Australian dollar. As confidence wilted and commodity prices were subjected to renewed selling pressure, the Australian currency retreated to a low near 0.89 before finding a base.