EUR/USD
The Euro maintained a firm tone ahead of the US open on Friday with firm support on any dips towards the 1.40 level.
The raft of US data releases was mixed, but had a slightly more optimistic tone. There was a reported 0.6% increase in retail sales for September while there was a 0.4% core increase and there was an upward revision to the August data. There was a decline in the University of Michigan consumer confidence index, but there was an increase in the expectations component to a 12-month high which may suggest a turning point.
There was also a significant gain in the New York manufacturing survey to 15.7 from 4.1 the previous month which created some optimism over the industrial sector even though it is a volatile data series.
Fed policy will inevitably remain an important focus with Chairman Bernanke's comments watched very closely on Friday. Bernanke stated that a decision whether to embark on a second round of quantitative easing would be dependent on forthcoming data releases. He was certainly very cautious over the outlook, but also voiced concerns over the risk of further asset purchases.
Given that the US data was slightly stronger than expected, there is likely to be some adjustment of expectations and the November policy meeting outcome is likely to be less clear cut which may stem selling pressure on the dollar. Nevertheless, there will still be expectations of further easing which will limit dollar support.
The US currency weakened to lows just beyond 1.4150 against the Euro following Bernanke's comments, but then recovered to the 1.40 area as US Treasury yields rose. The Euro remained vulnerable to profit taking later in the New York session and dipped to lows below 1.3950.
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Yen
Caution prevailed on Friday with a reluctance to sell the dollar aggressively ahead of the weekend, especially with significant US data releases later on Friday. There was a slightly more cautious attitude towards risk which provided some support to the yen during the session.
The Bank of Japan downgraded its economic assessment in some of the regions while Finance Minister Noda commented that Japan would take decisive action in the currency markets if needed. The dollar was unable to hold a move above 81.50 and drifted weaker towards 81.25 in early Europe.
The dollar gained some respite following the US data, with some improvement in yield support, but it was still blocked below 81.50. The US Treasury announced that it would postpone its semi-annual currency report until after November which may provide some degree of relief to the dollar on speculation of reduced US demands for stronger Asian currencies.
Sterling
Sterling found further support below 1.60 against the dollar in Europe on Friday as wider dollar trends tended to dominate the markets.
Bank of England MPC member Fisher stated that the bank might engage in further asset purchases, but that it was unclear at this stage whether further action would be required. Markets will remain on high alert over further comments from MPC officials and will also examine the latest MPC minutes very closely next week. A significant shift in rhetoric towards an easier monetary policy within the minutes would tend to undermine Sterling confidence.
Sterling peaked close to 1.61 before weakening back to below 1.60 later in the US session as there was a wider correction stronger for the dollar.
Swiss franc
The Euro advanced to a high near 1.3490 against the franc during Friday, but was unable to sustain the advance and retreated back towards 1.34. The dollar movements were cushioned to some extent by movement on the crosses and the US currency was unable to move above the 0.96 level.
The franc will lose some defensive support if there are reduced expectations surrounding a fresh round of quantitative easing by the Federal Reserve, but the franc is likely to be broadly resilient given expectations of medium-term policy action by the G7 central banks.
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Australian dollar
The themes of US dollar weakness and expectations of further quantitative easing by the Fed remained important factors supporting the Australian currency, especially with funds looking to channel funds into commodity-related instruments.
The Australian dollar rallied strongly again following the comments from Fed Chairman Bernanke and pushed to challenge parity against the US currency. After a brief flirtation with this level, it retreated back to lows underneath 0.99 as there was a further aggressive round of profit taking with short-term investors looking to scale back positions.
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