The US dollar remained under pressure on Wednesday, but sterling fell further amid weak trade data.
The UK’s trade deficit widened to £5.2bn in January from an upwardly revised £4.9bn in December, compared to expectations for a narrowing to £4.6bn.
“These numbers undo the signs of improvement evident in the last couple of months, and must also raise worries about the outlook for the manufacturing sector given the increasingly uncompetitive level of sterling,” said Daragh Maher, senior forex analyst at Calyon.
Talking of which, further data released yesterday showed UK industrial production fell 0.2 per cent month-on-month in January, although the manufacturing component did manage to sport a 0.2 per cent gain.
Rob Carnell, economist at ING Financial Markets, viewed the data as dovish for interest rates, and thus bearish for sterling. “The data certainly does not give the monetary policy committee the green light to raise rates in coming months, as some members have been threatening,” he said.
The pound fell 1 per cent to Y199.81 against a strong yen and 0.5 per cent to £0.6954 against the euro, although it drifted just 0.3 per cent to $1.9236 against a soft dollar.
The greenback fell for a second day, and once again there was little consensus as to why. Uncertainty prior to Friday’s US trade data was cited by some, particularly as this once again focused attention on the structural woes of the US, rather than the more dollar-positive cyclical factors.
Comments from Zhou Xiaochuan, the governor of the People’s Bank of China, revealing that the PBOC has been studying the option of moving from a dollar-peg to a basket arrangement, further damped sentiment.
Technical factors also played their part, with the breach of a support level on the dollar index leading Tim Fox at National Australia Bank, to suggest the euro could push to $1.36.
Rising oil prices were added to the mix yesterday. Adam Cole, senior currency strategist at RBC Capital Markets, said the trade-weighted dollar fell 4.8 per cent during last autumn’s oil price spike. Two months into a fresh oil rally, the dollar is little changed.
Mr Cole argued this was particularly anomalous given that high oil prices now look more “durable”, given a simultaneous rise in both oil futures and energy-related equities.
Moreover, during last year’s rally there was no consensus view as to whether high oil prices were dollar-positive or negative.
This time around there appears to be a growing acceptance that Opec nations will be looking to diversify a large slice of their increased dollar revenues into euros, selling dollars in the process.
The dollar fell 0.6 per cent to Y103.93 against the yen and 0.2 per cent to a fresh-two-month low of $1.3383 against the euro.
The yen was buoyed by solid economic data, with the diffusion index of leading economic indicators rising to 55 in January, the first expansionary reading for five months. This supported hopes that Japan may be climbing out of its shallow recession. The yen strengthened 0.4 per cent to Y139.03 against the euro.
The New Zealand dollar slipped from a 22-year high against the dollar, dipping 0.5 per cent to $0.7353, as Michael Cullen, New Zealand’s finance minister, said the level of the kiwi was starting to become a “real concern”.
“If the level of the New Zealand dollar creates some sort of systemic problem within the economy or within the financial system the [central] bank now has the capacity to engage in limited action,” he said.
The Australian dollar also fell 0.7 per cent to $0.7926 as a key index of consumer sentiment registered its largest ever fall.
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