The dollar weakened to around 1.3925 against the Euro in European trade on Thursday, a fresh record low, before a rebound to 1.3865. The dollar found further support close to 1.39 even though rallies quickly attracted selling pressure.
US jobless claims were little changed at 319,000 in the latest week which will lessen immediate fears that there has been a large increase in layoffs. Sentiment will remain very fragile, but the data may also ease fears that the housing-sector weakness will have a major negative impact on the wider economy.
The retail sales data will be watched closely on Friday and a drop in underlying sales would undermine confidence in the US consumer sector. There will still be strong expectations of an Federal Reserve interest rate cut next week, but a firm retail sales report would curb speculation over a 0.50% rate cut and provide some dollar support.
The ECB monthly report stated that monetary policy remained on the accommodative side and this maintained market speculation that there could be a further increase in interest rates late in 2007. There is still likely to be unease over the Euro-zone economy, especially with the IFW institute downgrading its 2007 GDP growth forecasts, and ECB rate expectations are liable to be scaled back slightly.
The dollar held above 114.0 in Asian trading on Thursday with wider consolidation evident in currency and equity markets which helped push the yen weaker against the Euro. The persistent strength in oil prices to record highs will be a be negative factor for the yen as well as the US dollar.
The latest weekly capital account data recorded an increase in capital outflows from Japan and the prospect of further retail selling will continue to hamper the currency. The Japanese currency continued to lose ground in US trading with depreciation beyond 115.0 against the dollar and 160.0 against the Euro.
Volatility levels are still likely to remain higher in the short term and a sustained period of dollar resilience will be needed to secure greater confidence in the US currency. Any renewed slide in global stock markets would also quickly revive yen buying.
Sterling weakened to lows below 2.0250 against the dollar on Thursday and also dipped to a 14-month low around 0.6875 against the Euro. The UK currency recovered sharply in US trading, helped by stop-loss buying.
The housing sector will continue to be an important factor for the UK currency. The August RICS survey recorded a decline in house prices for the first time in nearly two years. The survey will reinforce expectations that the housing sector is slowing and speculation that the Bank of England will not increase interest rates again. There will also be some speculation that the bank will cut rates next year.
The UK currency will tend to gain support if there is a sustained improvement in risk tolerances and renewed investor interest in high-yield currencies. The Bank of England also effectively relaxed its reserve requirements to help ease money-market stresses which raised hopes that conditions would stabilise.
The Swiss currency strengthened immediately after the interest rate decision on Thursday, but failed to hold the gains and weakened towards 1.1880 against the dollar. Similarly, the franc reversed initial gains against the Euro and dipped to near 1.65.
The National Bank increased interest rates by 0.25% to 2.75% following the council meeting. The central bank lowered its inflation forecast slightly for 2007, but the bank again expressed concerns over the recent franc weakness against the Euro.
The bank's decision to increase rates while other banks have been on hold or set to cut rates will provide some franc support. The Swiss currency will, however, also still be influenced by global risk aversion levels and strong stock market gains would undermine the currency.
The Australian currency has retained a firmer tone over the past 24 hours with a peak above the 0.84 level against the US dollar, although there has been evidence of selling pressure above this level.
The Australian dollar has continued to benefit directly from US currency weakness. Yield spreads for the Australian dollar have also improved this week which has increased confidence in holding the currency.
Some concerns over the domestic economy are likely to continue, especially as the latest housing starts data was weaker than expected. Any renewed increase in risk aversion would also be likely to weaken the currency sharplyDarrell Jobman