EUR/US$
The Euro was weaker in Asian trading on Monday and dipped to lows just below the 1.39 level during European trading. Overall risk appetite was generally weaker which increased defensive demand for the dollar as uncertainty over the global economy persisted.
There were also negative media reports surrounding the Euro-zone and ECB in the weekend press which tended to undermine the Euro. Overall confidence in the economy is liable to remain weaker in the short term which will tend to limit the scope for any substantial Euro advance.
Risk conditions stabilised in US trading and the dollar was also unable to extend gains through the 1.39 level. As has been the case in recent sessions, there was a reluctance to maintain aggressive positioning and the Euro was able to regain ground. Risk appetite was also supported by a recovery in US financial stocks which curbed dollar support.
The US economic data will be in greater focus on Tuesday, particularly surrounding the important US retail sales report, and risk appetite will tend to deteriorate again if there is a weaker than expected report. It is, therefore, the case that the dollar will counter-intuitively tend to gain ground if there is a weaker than expected report while it will tend to lose ground if sales are stronger than expected.
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Yen
Domestically, there is strong speculation that the government will call an election for August 30. There was no evidence of a major yen impact despite uncertainties over the implications of any government defeat.
The Nikkei index remained under pressure on Monday with a ninth consecutive decline and this limited selling pressure on the Japanese currency with the dollar struggling to push much above the 92 level as speculative positioning moved to a larger net long position on the yen. The Japanese currency also remained generally firm on the crosses.
Risk appetite staged a cautious recovery during Monday and the Japanese currency weakened back to the 93.00 region as safe-haven support was eroded by gains on Wall Street.
Sterling
Sterling dipped towards 1.61 on Monday with confidence unsettled by media reports that the Lloyds Banking group will announce further substantial debt write-downs when its results are reported late in July.
There were no economic releases during Monday, but data over the next 48 hours will be watched very closely and could have an important market impact. Any combination of weak data for consumer prices and a higher than expected increase in unemployment would increase pressure for the Bank of England to expand its quantitative easing programme which would also undermine the currency.
Sterling will also be strongly influenced by trends in risk appetite and will tend to prove much more resilient if there is a recovery in global sentiment. In this context, there was a rally back to above the 1.62 level against the dollar in New York as global confidence improved. There was also solid support close to 0.87 against the Euro.
Swiss franc
The dollar was unable to push above the 1.09 level on Monday and was generally weaker in US trading with lows towards the 1.08 region. The Euro resisted a test of support in the 1.51 region, but struggled to make strong headway and consolidated around 1.5140.
Producer prices were unchanged in June to give a 5.6% year-on-year decline and, although this was close to expectations, the annual drop in prices will maintain National Bank unease over the threat of franc strength and there will be the high risk of further market intervention if the franc advances towards 1.50 against the Euro.
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Australian dollar
Confidence in global markets remained generally weaker in Asia on Monday and this pushed the Australian currency to lows near 0.7700 against the US currency with further evidence of selling against the Japanese yen. The tone is likely to remain generally cautious in the short term.
Nevertheless, there was an improvement in risk appetite in US trading as stock markets recovered ground and the Australian currency pushed to a high above the 0.7830 level as gold prices also gained ground and the US currency lost wider support.
