Asian markets had a slightly calmer session on Wednesday with the PBOC pledging to provide additional liquidity, although the were still net losses on the Shanghai bourse as underlying credit-crunch fears persisted. There were reports that some Chinese lending curbs were being imposed which undermined risk conditions with USD/JPY again hitting supply towards 98.0.
Precious metals continued to attract substantial attention during the day as gold prices again fell sharply with silver also gapping lower. Spot gold prices fell to the lowest level in almost three years at below $1,225 per ounce with silver dropping to lows below $18.50 during the European session. The slide in gold prices provided significant underlying dollar support.
The Australian dollar was an important focus due to the slide in commodity prices and domestic politics. In a snap vote of confidence poll amongst Labour MPs, incumbent Prime Minister Gillard lost the vote to former Prime Minister Rudd and immediately resigned from office. The Australian currency proved surprisingly resilient in the face of potential selling pressure and quickly found support on dips with AUD/USD buying on dips toward 0.9250.
An easing of underlying fears over a collapse in the dollar and reduced speculation over a surge in inflation continued to undermine demand for gold while selling has increased pace sharply. The slide in gold also helped underpin the dollar as EUR/USD continued to test support levels. There was a Euro retreat through 1.3070 and 1.3050 which triggered lows near 1.3010 with the Euro damaged by fresh concerns surrounding the Italian economy while underlying dollar demand remained firm.
In contrast to Tuesday, the latest US economic data was weaker than expected with the final first-quarter GDP data revised down to 1.8% from 2.4% with a downward revision to investment. The data did unsettle the dollar, especially against the yen, although the overall impact was relatively muted. There was a more cautious approach to dollar buying which allowed a brief EUR/USD rally to the 1.3050 area before selling pressure resumed.
The UK government spending review was broadly in line with expectations as the Treasury looked to make further departmental spending cuts, aiming to keep tight overall control on spending while protecting key priority areas. There was a measured Sterling reaction as international trends assumed greater importance that domestic politics. GBP/USD retreated to lows just below 1.5350 before recovering slightly. Sterling was also broadly resilient against the Euro even with reported month-end Euro demand.