The dollar held onto overnight gains against the European majors and rose to a five-day high of 120.58 yen in Asian trade. Despite the ever-present uncertainty of US military strikes in Afghanistan, and possible terrorist retaliation, the dollar rose over one percent against the Swiss franc, euro and pound on Tuesday. Dealers cited position squaring as ebbing safe-haven flows gave investors reason enough to take profit from short dollar positions. Concerns that the euro had gained relatively little ground since the much-anticipated military retaliation against Afghanistan began on Sunday, and that the pound was also in a compromised position due to its involvement in Afghanistan, helped undermine earlier gains. The effectiveness of the US/UK bombing strikes as well as the apparent defection by a number of Taliban generals and infantrymen to the Northern Alliance lent support to the dollar. Nevertheless, any unexpected terrorist responses to the US military action is seen as likely to send the dollar tumbling yet again.
EUR/USD hovered near last week's support level at 91.27 after again failing to maintain gains above the 92-figure. After meeting with strong resistance at 92.40 on Monday, the euro continues to be feel the pressure of its downtrend resistance line around 92.25. Only sustained gains above this level would bode well for the pair because the euro is not seen as a safe haven by investors and it will come under further pressure against the Swiss franc if investors turn more cautious. A break of current support at 91.25 would call upon 90.85 followed by 90.50 and 90.35, its pre September 11 support.
USD/JPY rose to a 5-day high of 120.58 before falling on Japanese exporter selling to support around 120.35. The dollar rose one-half yen on short-covering but many dealers were unwilling to establish new long dollar positions amid the ever-present uncertainty of US military strikes in Afghanistan, and possible terrorist retaliation. EUR/JPY also retraced overnight losses but failed to maintain above the 110 level after plunging over one yen from overnight resistance around 110.70. Failure to maintain support above the 109.90/110.10 area is seen then targeting 109.20.
GBP/USD posted the steepest losses, as it fell from Monday's 8-1/2 month high of 1.4836 to a 2-week low near support at 1.4560. Sterling broke below support at 1.4710 in European trade Tuesday after it was again unable to maintain gains above key resistance at 1.48. Large buying of EUR/GBP cross also gave a boost to the dollar as sterling fell to a one-week low against the euro at 62.81 pence. However, the euro's failure to maintain above support at 62.60 pence is seen targeting support at 62.35. A recent top at 1.48 against the dollar and failure to hold above support at 1.47 may have signaled a reversal of the 3-1/2 month bull trend in GBP/USD. Moreover, a break of uptrend support at 1.4650 is truly a negative indication for Cable. Support now seen at 1.4580. Failure to hold this level would then establish a target of the 38.2% Fibonacci retracement of the move from 1.37 to Monday's 8-1/2 month high of 1.4836.
Meanwhile, the Swiss franc lost some of its luster as investors were disappointed by its inability to break back through resistance at 1.61 against the dollar. Problems in the banking and airline industry weigh on the franc, as well as the Swiss National Banks commitment to lower interest rates to avoid an appreciation in the franc. For now, USD/CHF upside seen capped at 1.63, while support stands at 1.61. Therefore, any negative news about possible terrorist strikes will easily send the franc higher from its current price around 1.6240.