LONDON (AFX) - The dollar remained in a tight range against the yen in early morning trade, after a lacklustre response to Bank of Japan's monthly financial report.
The Bank of Japan said it "slightly downgraded" the economic assessment in its July report, saying that the economic adjustment is intensifying in line with the deterioration of production activity. UBS Warburg FX strategist Shahab Jalinoos said that although the market hadn't been looking for a second monthly consecutive downgrade in Japan's outlook, the market had already priced in a further weakening in Japan's economy.
Jalinoos said the BoJ will need to provide signs that it intends to ease monetary policy further, before it is likely to see a further rise in dollar-yen.
Longer term, Jalinoos said he is looking for a move higher in dollar-yen, but over the next few weeks he expects the unit to remain within a tight range.
Federal Reserve board chairman Alan Greenspan will deliver his semi-annual testimony to Congress on monetary policy and the economy on Wednesday.
WestLB Panmure's Richard Grace said he expects Greenspan's testimony to be dollar positive as long as his growth outlook is neutral to slightly optimistic.
UBS Warburg's Jalinoos expects Greenspan to reiterate that there are signs of improvement in the US economy, and that inflation is not a problem, but that he is also ready to act with a further interest rate cut if necessary.
He is looking for a 25 basis point cut to be made on Aug 21, which -- judging from market reactions to previous rate cuts-- he expects will benefit the dollar. A further rate cut would prove Greenspan has reacted energetically to the US slowdown, Jalinoos added. Jalinoos also pointed that the dollar is likely to continue to gain, considering that the European Central Bank has still disappointed the market with its rates.
However, WestLB Panmure's Grace pointed out that volatility in emerging markets should remain high, given the uncertainty about the economic situation in Argentina, which could impact dollar again. Several UK data are expected this week, including the June claimant account, May average earnings, and June retail sales. UBS Warburg's Jalinoos said the market is "unwilling to make a firm call either way on whether the UK economy is going to slow down, or pick up pace in the month ahead."
He pointed out that the industrial sector is very weak, whereas the services sector is still holding up, "it'll be a question of which can pull the other one," he said.
He expects euro-dollar to fall lower, and that will take euro-sterling with it.
WestLB Panmure's Grace noted that BP PLC's announcement to acquire the oil business of E.ON AG in a transaction worth 6.5 bln eur will keep euro-sterling close to 0.61, while the unit should remain under some pressure.