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The dollar rose to a 12-day high of 131.44 after breaking option barriers at 130.65 and 131.00 to rise over two yen on the day. Losses in Tokyo stocks today fuelled suspicion that recent inflows into Japan ahead of fiscal year-end may be reversing and recent gains in the yen have been highly correlated to the Nikkei's rebound. This makes sense considering that Japan's weak yen policy dragged the Nikkei to an 18-year low as it damaged confidence in the ability of Japanese assets to hold their value. Similarly, Japan's attempt to support the Nikkei ahead of FY-end in March was accompanied by a shying away from the weak yen policy, which had enticed traders to short the currency.
USD/JPY has now retraced nearly all of its losses since falling below the 131.50/80 support zone nearly two weeks ago and the market is set to test key resistance at 131.65, which marks the 61.8% retracement of the move from 134.95 to 126.32. A break below 129.65 would put the bull on hold, but only a breach of 127.75 would signal a resumption of the bear. However, this is not likely given the end of fund repatriation by Japanese investors this month, which should further encourage dollar bulls.
Therefore, since the recent yen rise was predominantly a speculative affair based on artificial measures to boost Japanese share prices, the yen is now experiencing a similarly rapid decline as temporary measures to boost the Nikkei fade and speculators unwind their long positions. Moreover, speculators are also unlikely to remain long the yen as concerns over the health of Japan's banking sector mount in the midst of the economic quagmire that is Japan.
Meanwhile, the dollar was little changed against the European majors as the dollar's upside is seen limited ahead of the Federal Reserve's policy meeting on Tuesday where some believe it could change its policy stance from the current view, which sees the economy at risk of further weakness, to neutral. Expectations of such a shift, as well as stronger US economic data late last week have helped the dollar stave off further losses.
EUR/USD fell back to a day's low of 87.92 after failing to break strong resistance in the 88.50-88.80 range on Friday. But EUR/USD steadied around 88 cents as USD/JPY gains spilled over onto EUR/JPY as well. Last week's bounce off of 87 cents was also a signal that the market was not yet ready to sell EUR/USD below that level and the pair has remained above 87.10/00 since then. A break of that key support would damage the bullish sentiment. Support seen at 87.80 and 87.50.
Eurozone inflation for February was revised down to 0.1% from 0.2% which brought the yearly rate down to 2.4% from 2.7% in January. The news had little effect on rates and the market expects the European Central Bank this week to keep rates on hold.
EUR/GBP fell to a day's low of 61.74 pence. Weighing on EUR/GBP was a report issued today by Britain's Institute of Directors (IoD) which was decidedly against the prospect of the country adopting the euro, saying the currency was a political project which would have negative implications for business. Gains against the euro allowed sterling to test a 1-week high of 1.4250 but only a move above 1.43 would be bullish for the pound. Key cable support now seen at 1.4180. Last week sterling tested trendline support at 1.4115. Resistance is eyed at 1.4277 and 1.4332, the 50% and 61.8% retracement of the same move.
USD/CHF also rose to a day's high of 1.6660 after stabilizing above 1.6480 last week following a five-franc retreat over the past week. The franc has benefited across the board as safe-haven flows sparked by fears of US military action in Iraq added to recent gains. But, CHF softened in early trading on Monday after SNP president Roth said the bank could cut interest rates further although all options were open. Roth said the SNB remained concerned about the level of the franc but would not target a certain level. Markets had expected on March 21 the Swiss National Bank to keep rates unchanged, thereby limiting the downside pressure to the franc. Recent commentaries by SNB board members indicate that the high level of the CHF is a concern, but by itself not sufficient to affect the FX rate. Yet the market would regard a rate cut as an attempt by the bank to weaken the franc through easing liquidity. Any correction seen capped at 1.6747, the 38.2% retracement of the 1.7115-1.6517 move.