Weak data undermines currency converters

The dollar fell back slightly following weaker than expected weekly jobless claims figures, though losses were limited as a weaker opening on Wall Street heightened investors' risk aversion.

The Labor Department reported 334,000 new claims for the week ending August 25, while economists had predicted 322,000 new claims. That was the most new claims since 341,000 in the week ending April 14 and prompted concerns that troubles in the US housing sector are spreading to the labour market.

However, with financial markets remaining volatile the dollar's fall was relatively low, with investors' attention focused on the weak opening on Wall Street. In the current environment movements in other markets, rather than data are what's driving currencies, and rising risk aversion is helping support the dollar.

Risk aversion supports the dollar as investors withdraw funds from riskier overseas assets, converting them into the US currency.

Meanwhile release of revised US second quarter GDP figures - which revised the annual growth up to 4.0 % from the previous estimate of 3.4 % had negligible impact on the dollar, being largely in line with analyst expectations.

Prior to the data release, the dollar had been firming, boosted by expectations that the Federal Reserve will cut its key Fed funds target rate from the current 5.25% at its next rate-setting meeting on September 18.

Though a prospective rate cut reduces the dollar's yield attraction, the US currency has garnered some support from more hopes the Fed will do enough to prevent the US economy from sliding into recession in the wake of the sub-prime crisis.

Now attention will turn to today’s speech by Fed chairman Ben Bernanke at Jackson Hole, with market participants looking for hints on whether the cut will materialise.

Bernanke is likely to leave many in the market disappointed and play down the prospect of a cut, emphasising that the Fed will only lower rates as the economy slows, and not because of what's happening in the markets.

Meanwhile the Pound continued to climb, boosted by data out yesterday morning suggesting that the Bank of England's 125 basis point rise in interest rates in the space of a year is still yet to bite. Figures from the BoE showed mortgage approvals, a key gauge of future activity in the housing market remained stable at 115,000 in July, unchanged from June and above expectations for a dip to 110,000.

This strength in activity will provide ammunition to the hawks in the Monetary Policy Committee and as such keeps the options open for one more rate hike.

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