LONDON (AFX) - Major currencies were caught in narrow ranges against each other in quiet early trade with Fed chairman Alan Greenspan's cautiously positive testimony yesterday working to keep the dollar underpinned, dealers said.
Conversely, calls from a coalition partner of the ruling Liberal Democratic Party for Japanese prime minister Prime Minister Yoshiro Mori to step down benefited the yen, after it heightened hopes for a new pro-reform leader, they added.
"Trading so far is quiet and rangebound, but the yen appreciated earlier, partly on the calls for prime minister Mori to resign," Ray Attrill, economist at 4cast said.
Euro/yen also corrected on the back of a large order made by a Japanese life insurer, probably to repatriate profits, he added. However, after the initial bumpy ride, euro/yen has settled to the mid 107 yen level, he said.
Fed Chairman Alan Greenspan's testimony yesterday saw the dollar well underpinned. Greenspan's tone was one of cautious optimism. It was always likely that Greenspan would attempt to talk-up the economy in his semi-annual testimony yesterday, given his emphasis on the importance of confidence in the business cycle, Paul Meggyesi at Deutsche Bank said.
"Despite this bias, investors reacted to Greenspan's cautiously positive words by concluding that the economy is perhaps not as bad as seemed in December and that the worst is perhaps over," he added. Perhaps the most important remarks from Greenspan were that the economy is not in recession and that the extreme weakness in December did not carry over to January. These sentiments were supported by the stronger than expected rise in January retail sales, Meggyesi said. Against this backdrop, the euro was stuck just under the 0.92 usd mark.
Today's only U.S. data is the inventory figures for December which will help in assessing how much of an stock overhang there was, and how much this will subtract from first and second quarter growth, Meggyesi added.
Sterling was steady ahead of the Bank of England's first inflation report for the year. Many see the BoE cutting its inflation forecast to show the central projection falling below the official 2.5 pct target. Foreshadowing this, RPI-X inflation in January fell to 1.8 pct, the lowest since records began.
4cast's Attrill however believes the BoE will aim to show that inflation is only likely to remain under the 2.5 pct for the short to medium term before rising to official target levels in the longer run.
"Falling rate expectations might be a short-term dampener for sterling, but with real yields remaining attractive and domestic growth remaining robust, we doubt whether modest cuts in nominal rates should hurt sterling that much," Meggyesi added.