LONDON (AFX) - The dollar was soft against major currencies in early London trade and dealers warned the downtrend will continue after the US Federal Open Market Committee interest rate decision at 7.15 pm tonight.
They added their failure to break below the 0.9095 level on euro/dollar yesterday would result in market participants covering short-positions and getting long again.
Phil Roberts, technical analyst at Barclays Capital, said: "We are looking for some near-term dollar weakness, with the euro/dollar risk to probably 0.9280 and dollar/Swiss Franc down to 1.6470 in the next 48 hours."
The analysts pointed out that the pattern for each US Federal Reserve rate cut had been that, "initially the dollar tended to weaken and then 24-48 hours down the line it starts strengthening again". Adrian Schmidt, economist at the Royal Bank of Scotland, said: "The Fed's rate announcement remains the main focus, although almost everybody looks for a 25 basis point rate cut, with a bias to ease." He added that in the absence of any news today, the euro had little chance to manage break to the upside above 0.92 usd..
Of economic news, the ZEW German leading indicator for August will be released at 3.00 pm today. Meanwhile Italian cities CPI for August will also be released today at 11.30 am.
Schmidt said remarks by Germany's senior advisor to the government, Horst Siebert, that the European Central Bank did no need to follow the US Federal Reserve in trimming rates were "immaterial". "I don't think anyone is paying a great deal of attention to what the European officials say about the ECB. We are a bit tired of being misled about various issues and I don't think there is any belief that the government has any influence on the ECB," Schmidt.
Meanwhile analysts said the Swedish krona was falling like a stone.
The Swedish krona/euro pair recovered slightly from yesterday's new year lows of 9.40 but continues to suffer from weak equity market and its exposure to the tech sector, particularly with Ericsson.
Analysts said the downward trend was further exacerbated by structural issues such as portfolio diversification of pension funds. "As long as the global economic outlook and in particularly the tech sector outlook remains negative, it is hard to see the krona recover very much," Schmidt said, adding that a break of the euro below 0.91 usd would drag the Swedish krona lower.
The economist added: "We still favour the downside in the short run, if anything it's more likely that the 0.91 usd will go than 0.92 usd, but not with any huge confidence."
Sterling firmed as a reflection of the weaker euro/dollar pair, fast approaching the psychologically important 1.45 usd level. "The fact that we broke above the 1.45 usd last week is a decent signal that negative sentiment has partially faded but still the underlying picture for sterling/us dollar will depend on what happens to the dollar in general. I don't think there is a great deal of independent life," concluded RBS's Schmidt.