A Defensive Euro Dips to New One-Month Low

01/15/2009 11:58 am EST

Focus: FOREX

Darrell Jobman

Editor-in-Chief, TradingPlanet.com

The euro remained on the defensive during Tuesday trading, and dipped to a fresh one-month low near 1.32 against the dollar following the US data.

Concerns over the euro-zone economy persisted with further speculation that Spain's credit rating could be downgraded. The ECB council meeting also remained an important focus amid further speculation over a cut in interest rates. Sources suggested that the bank would consider a 0.50% rate cut at the meeting, but that other alternatives would be discussed. Markets should have priced in a reduction, which will limit further selling, especially with sources also suggesting that the bank overall would be cautious.

The US trade deficit was sharply lower than expected, with a decline to US $40.4 billion for November from a revised US $56.7 billion the previous month, and this was the lowest figure since November 2003. Exports fell by over 5% over the month, while there was a very steep 12% decline in imports.

In part, imports were undermined by the sharp decline in oil prices, with crude imports declining by US $15 billion for the month, but there was also a wider downturn in inward shipments, which will reinforce fears over the very sharp downturn in activity. The underlying trade improvement will still provide some medium-term dollar support.

Fed chairman Bernanke continued to express major concerns over the economy with comments that further bank bailouts may be required. The structural vulnerability was also illustrated by a US $83 billion Federal budget deficit for December, compared with a US $45 billion surplus last year.

Despite US doubts, the euro maintained a weaker tone and dipped to lows near 1.3150 in New York before a slight recovery.

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Yen

Direct fears over the financial markets have eased, but confidence in the global economy has deteriorated, while there have been further fears over credit rating downgrades in countries such as New Zealand, which will tend to deter flows out of Japan.

The Japanese data remained weak, with a depressed reading for the PMI services sector, while the strength of bank lending appeared to be a sign of weakness in cash flow and other credit sources, rather than corporate confidence. With the Nikkei index falling sharply, the dollar was trapped close to 89.0, while the yen strengthened further against the euro.

The Keidanren industrial organization stated that there was the need for intervention to weaken the yen. The comments will increase speculation that there will be official action in the markets, while the further reduction in Libor rates should still limit defensive currency support. The yen weakened to near 90 after the Keidanren comments before regaining ground.

Sterling

Sterling came under fresh pressure during Tuesday trading, with no domestic incentives for buying, while weaker global risk appetite also undermined the currency. The UK currency dipped sharply to lows below 1.45 against the dollar and 0.91 against the euro.

The retail sales evidence remained weak, with the BRC report recording an annual like-for-like sales decline of 3.3% for December, while there was a very weak BCC survey on business trends. Sterling should still gain some protective support from the major difficulties seen in other global economies.

The UK November trade deficit for goods rose to a record GBP 8.3 billion from GBP 7.6 billion previously, as non-EU exports declined. The data will further undermine confidence in the economy, with fears that the improved competitiveness will not have a major beneficial impact on trade given weak overseas demand.

Swiss Franc

The dollar struggled to sustain gains above the 1.12 level against the franc on Tuesday, but maintained a generally firm tone. The Swiss currency also secured firm gains against the euro, with highs beyond 1.4750.

The Swiss currency drew some further support from the decline in risk appetite as European equity markets remained under pressure.

Fears over European credit rating downgrades also triggered some demand for the Swiss currency, and degrees of risk appetite will remain very important factors in determining short-term franc trends.

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Australian Dollar
The Australian dollar has remained on the defensive over the past 24 hours, as risk appetite has remained weaker. Global economic fears have increased, which has put commodity prices under pressure, and the risk of a credit rating downgrade for New Zealand also put downward pressure on the regional currencies.

The Australian dollar pushed to lows below 0.67 against the US dollar in local trading on Tuesday. The underlying mood of caution is liable to prevail in the short term, and wider US currency strength pushed the Australian dollar lower again in New York, with a trough below the 0.66 level.

By Darrell Jobman of TraderPlanet.com

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