With the U.S. stock markets down on 5 of the past 6 days, global equity concerns are weighing on the U.S. dollar. Though the dollar rose against the euro on Thursday after data showing October U.S. core consumer inflation in line with forecasts a rebound in the greenback is not a given. Continued worries that a struggling U.S. housing sector and lingering credit problems could hurt the broader economy, continue to keep downward pressure on the USD and keep any gains capped. Rate cut worries in the US will insure that the market continues to sell dollars throughout the remainder of the year. Many analysts believe that a Fed cut in December is almost certain at this time.
Global tensions over currencies are growing and will dominate this weekend's meeting of the Group of 20 nations, but any co-coordinated action plan is unlikely. The U.S. dollar has fallen sharply in recent weeks, exacerbating concerns for exporters outside the United States. Officials from the United States, Europe and Canada are singling out the tightly controlled Chinese yuan as one major currency that has not made a fair adjustment to help rebalance global trading conditions.
Abrupt movements in currencies are not welcome, but the European economy has coped well with the euro's rise, European Central Bank Executive Board member Juergen Stark said today. "The rise in the euro has helped dampen the impact of very sharp rises in international commodity prices," he said, adding that politicians should not overlook this effect. The euro is likely to continue its climb to the 1.50 level by year end.
The British pound dropped to a fresh four-year low against the euro and 3 ½ week lows against the USD, after UK retail sales data showed an unexpected monthly fall in October, boosting the case for Bank of England rate cuts, most likely starting in February 2008. Retail sales fell 0.1% on the month versus expectations for a flat reading. The Bank of England's King said he hoped Britain's trade deficit, which has been a drag on growth, will reverse into the black and help the economy. Britain's global trade deficit widened more than expected in September to a record 7.75 billion pounds ($16 billion) with the strength of the pound against the U.S. dollar squeezing exports.
The Japanese yen has regained its footing to strengthen against the USD. Japanese Prime Minister Yasuo Fukuda has said the yen is appreciating too quickly, warning currency speculators of the possibility of intervention. "Any kind of sudden change in exchange rates would not be desirable," said Fukuda.
Following yesterday’s comments from senior deputy governor of the Bank of Canada, Paul Jenkins, the Canadian dollar is testing recent resistance levels as it slides lower for the 4th consecutive day. Jenkins, said that a persistently high Canadian dollar could pose a threat to Canadian economic growth and push inflation lower. Though the CAD should remain well supported in the next months, especially if the likelihood of another rate cut in the US increases, a continued fall in commodity prices will weigh on the currency.
The Australian regained its footing as strengthening regional stock markets encouraged investors to return to riskier positions in high-yielding currencies. Though the AUD remains well below the 24-year high it breached last week, it is showing signs of a rebound, supported by the prospect of increasing interest rates.
New Zealand dollar finished the local session slightly lower as retail sales figures for the third quarter came in below forecasts, indicating no change in interest rates. Analysts are uncertain on the outlook for the kiwi, with concerns that credit-related losses could push the U.S. economy into recession hitting appetites for risky assets like the high-yielding kiwi.
