EUR/US$
The Euro was unable to push back above 1.2730 against the dollar on Thursday and weakened to test support at 1.2665 in New York. The Euro pushed back to 1.2685, but was still vulnerable to corrective pressures.

Emerging-market and high yield currencies were subjected to further stresses during Thursday on rising geo-political tensions and there is the potential for a flow of funds back to the dollar as positions funded through the dollar are cut. There will also be the potential for a buying of US Treasuries on safe-haven grounds which will offer near-term dollar support. The longer-term implications will remain less benign for the US currency, especially if Wall Street continues to weaken.

US jobless claims rose 332,000 in the latest week from 313,000 previously, but this failed to have a significant impact. The retail sales data on Friday is likely to be influenced strongly by gasoline sales and weakness in the underlying data would tend to erode dollar sentiment, although a substantial impact is unlikely.

In its monthly report, the ECB repeated comments that it would stay strongly vigilant on inflation and pursue a progressive interest rate policy. There will be continuing expectations of an early August interest rate increase which will offer background Euro support. The Euro will, however, need a downgrading of US interest rate expectations to make strong headway on yield grounds.

Yen
The yen was unable to sustain a break of 115.0 against the dollar on Thursday and weakened to near 115.50 in New York as the dollar secured wider gains.

The Bank of Japan policy decision will dominate over the next 24 hours and the bank is likely to sanction a 0.25% increase in rates. The hints on future policy and size of a discount rate increase will be the most important factor for the yen with the yen vulnerable on a soft stance by the bank. There will, however, also be further speculation over a Chinese move to increase interest rates again which will offer yen support.

The Japanese current account surplus amounted to JPY1.61trn for May. From a longer-term perspective, the income account is continuing to strengthen, but the capital account remained weak. The June capital account figures also recorded outflows from the stock market for the second successive month and the yen will struggle to secure strong gains until this position reverses.

Sterling
Sterling was unable to sustain gains above 1.8450 against the dollar and retreated to 1.84 later in New York, but the UK currency was able to make further gains against the Euro.

The Treasury has announced the two new members of the MPC committee with the appointment of Besley and Sentance from September. The appointments are liable to have a slight negative impact on Sterling given that Sentance had recently voted for a rate cut, although the impact should be limited at this stage.

There is still evidence of merger-related flows into Sterling out of the Euro which will provide important near-term support for the UK currency.

Swiss franc
The Swiss currency strengthened to near 1.5600 against the Euro during Thursday and was able to resist losses beyond 1.2350 against the dollar as the franc gained wider backing.

The franc will tend to gain further short-term support from increased Middle East tensions and a breakdown on talks between North and South Korea. The potential for franc appreciation will increase if there are sustained falls in stock prices with the small possibility of strong gains if global political and economic risks intensify in tandem.

Australian dollar
The Australian dollar pushed to 0.7565 in early Europe on Thursday and, although it weakened slightly in New York as the US dollar gained ground, the Australian dollar retained a firm tone.

The employment data was sharply stronger than expected for the second successive month with a 52,000 increase for June and the unemployment rate was unchanged at 4.9%. Domestic strength will reinforce speculation over a further increase in interest rates and the domestic CPI data due in two weeks could be decisive for the August central bank decision.

Market expectations over higher interest rates will offer important short-term Australian dollar protection, but rising risk aversion will still pose important currency risks.