By Cornelius Luca.
New York, July 24 (BridgeNews) - The U.S. dollar gravitated lower on profit taking following its Monday gains in a market dominated by Fed Chairman Alan Greenspan's promise to cut rates further if the economy remained weaker than forecast. Progressively positive euro-zone data and a mild decline in inflation helped the euro advance to a four-day high of 87.72 cents.
The current sub-par performance of the U.S. economy is not yet a thing of the past, and the Federal Reserve may need to lower interest rates again if economic performance is weaker than anticipated, Greenspan reiterated Tuesday in remarks virtually identical to those he delivered last week..
"At the end of the day, (monetary policy) does seem to be effective," Greenspan said..
While hard to gauge it correctly during the slow summer activity, dollar's recent undecided tone might owe to cash outflows. UBS Warburg research shows that the U.S. saw a huge net outflow of $743 million in the week ending July 20. The beneficiaries were Continental Europe with $444 million and the Asia/Pacific region with $242 million..
Both euro/dollar and euro/yen advanced at midday on speculative demand, sending the cross currency to a two-month high of 108.72. Euro/dollar's upside was slowed down by resistance at $0.8765 from the 100-day moving average, and faces a big hurdle at $0.8790 from a Fibonacci retracement level..
"While we remain averse to buying euro/dollar, due to our expectations for general dollar strength in the months ahead, buying euro/yen is starting to look like an attractive long-term proposition," said UBS Warburg analyst Shahab Jalinoos..
Despite the fact that the influential Ifo index showed Monday that western German business climate has fallen for the fifth month in a row in June, the German Federation of Industry reported signs that the pessimistic sentiment among German businesses could be overcome in the course of the year..
In this vein, German industrial output was revised upward to +1.1% in May from the previously announced +0.9% and French consumer spending on manufactured goods rose a greater-than-expected 1.5% in June from a revised 0.8% drop in May..
Meanwhile, French consumer prices remained unchanged in June after a sharp 0.7% rise in May and rose 2.1% on an annual basis, and German preliminary CPI came in at +0.1% in July and at +2.7% year-on-year. These levels remain above the key 2% mark identified by the European Central Bank as a worrisome inflation level, thus chipping away at the odds of interest rates easing before the third quarter..
Wednesday's range of euro/dollar, based on one standard deviation, should be confined between $0.8678 to $0.8826..
Dollar/Swiss franc fell to a four-day low of 1.7185 while sterling/dollar reversed losses from a five-day low of $1.4160. Unable to penetrate conclusively the resistance at 124.46 from a Fibonacci retracement level and at 124.56 from its 20-day moving average, dollar/yen slipped on profit taking. But the pair traded in a tight range of 42 points in the U.S. market and never left the confines of the Monday's range..
A sharp recovery in Japanese stocks weighed on the pair as well. However, UBS Warburg's Jalinoos noted that Japan's Chief Cabinet Secretary Yasuo Fukoda announced that there were no steps planned to specifically boost the stock market..
"This could weigh on Japanese equities tomorrow, as the market was growing hopeful that new measures were in the pipeline," said Jalinoos. A Nikkei poll has indicated that Japan's Prime Minister Junichiro Koizumi's extraordinary popularity has declined to 69% from 85% in June, increasing the odds that the conservative elements of the ruling LDP will hamper his reform effort..
"While still a strong showing, this slide suggests greater risk for the reform Koizumi has advocated. Our economics team continues to believe that the LDP will maintain its majority in the Upper House elections this Sunday and that Koizumi will be able to push forward his reform program," said Robert Sinche, head of global currency strategy at Citibank/SSB. The Japanese economic indicators were mixed, with June chain store sales down 4.8% from a year earlier and June department store sales up 2.4% on the year..
Wednesday's trading range for dollar/yen, based on one standard deviation, is expected to be between 123.20 and 124.52..
Dollar/Canada fell to a five-day low of 1.5379 on profit taking after peaking Friday at a seven-week high of 1.5473. Support remains at 1.5363 from a Fibonacci retracement level..
Both Australian and New Zealand dollars remained sidelined within their respective Friday respective ranges..
In other news, a U.S. Treasury official said that Treasury Secretary Paul O'Neill and Bank of England Governor Eddie George share the same views on the U.S. dollar. This opinion seems to be contradictory since O'Neill adheres to the strong dollar policy while George recently described the dollar's impact on the international economy as "perverse."