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The major currencies followed their own paths in London trade as dealers reacted to more than just the dollar's doldrums. The yen came under pressure, driving it out of previous tight ranges and sent EUR/JPY to a 4-1/2 month high of 118.30 as dealers are weary of Japan's repeated interventions which have put a rising floor under the dollar since their first intervention 10 days ago. Sterling also rose today on a newspaper report that media mogul Rupert Murdoch would campaign against British entry into the euro. This pushed EUR/GBP down and the general dollar weakness allowed GBP/USD to rise to a 2-1/2 week high of 1.4672. Meanwhile, the dollar rose against the Swiss franc given the fall in Gold prices to 3-week lows on the back of easing tensions between India and Pakistan.
A recovery on Wall Street helped the dollar regain its footing on Monday and the greenback is now trading higher in light European trade due to a lack of key economic data and interest in the World Cup matches. Later in the week retail sales, industrial production and consumer confidence data will likely give direction to Wall Street and dealers will therefore remain focused on US equities.
Fortunately for the dollar, the Dow remained above the 9,500 mark after dipping below that mark last week. This level is psychologically important for the dollar because the last time the Dow broke below 9,500 was the week of September 11. Therefore, dealers will be alert to a further decline on Wall Street this week which would add to investors' fears and the dollar's downward momentum after a brutal show last week that sent it to 17-month lows against the euro.
EUR/USD again failed to break last week's 17-month high of 94.87, but has remained decidedly above 93.93, the 62% retracement of last week's 93.35 to 94.87 rally. A fall to that level overnight found good bargain hunting from dealers keen to buy on the dips. Support is seen at 94-cents, which happens to mark current trendline support. Resistance is seen at the 17-month high of 94.87 followed by 95.00, 95.50 and the January 2001 high of 95.95. After that the next target would be parity with the dollar.
Making the euro's rise slightly more difficult is the fall in Gold prices to a 3-week low in the London fix after sharp losses overnight in New York put it below support at $320. Dealers blame the World Cup, and the easing of tensions between India and Pakistan which have lead to profit taking. For the past week the dollar has also held up against the Swiss franc with traders unwilling to push USD/CHF below the 1.55 handle. One possible implication is that with traders taking profit from Gold's steep rise, EUR/USD could be next given the large number of outstanding euro long positions in the market.
EUR/GBP also came under pressure today on a newspaper report that media mogul Rupert Murdoch would campaign against British entry into the euro. As of Friday, the government has exactly one year to initiate a move to join the euro. The Treasury is supposed to make a decision on the 5 economic tests of convergence, which include economic flexibility, inward investment, financial services (the City), and employment. Of concern to most eurosceptics is that London remains a top financial center and the UK remains Europe's most popular location for inward investment. The other fear is that Britain would not fare well under a single interest rate, given Germany's woes the past year.
General dollar weakness allowed GBP/USD to rise to a 2-1/2 week high of 1.4672, past initial resistance at 1.4635, but not past 1.4680. If sterling can maintain a base above 1.4635/30 it could test 1.4680 and the 1.47 mark. Support stands at 1.4575-80, 1.4535-40 and by 1.45.
Sterling was supported by better than expected rise in UK industrial production to 1.1% in April, which sent the annual rate to down 4.1% from down 5.9%. The trade deficit also improved to 2.43 from 2.8 bln sterling as trade with European partners improved.
Data from Germany was less notable as German industry output rose less than expected at a mere 0.2% in April. But the trade surplus narrowed, indicating a possible recovery in German domestic demand which could translate into a full point rise in the German ZEW survey later today to 67.3 in June after setbacks in the previous months. The ZEW is seen as a leading indicator to the highly anticipated Ifo survey released two weeks later.
Meanwhile, the FX market remains highly concerned about the shift out of US assets. This is the main driver behind EUR/USD and a stabilization on Wall Street could drive the dollar higher given the fall in Gold prices on the back of easing tensions between India and Pakistan.
JPY came under pressure across the board as EUR/JPY rose to a 4-1/2 month high above 118 which triggered stop loss selling of the yen, driving it to a low of 118.30 and helping USD/JPY rise to a 2-1/2 week high of 125.43. But exporter offers at 125.50 still keep a lid on the pair. Dealers are weary of Japan's repeated interventions which have put a rising floor under the dollar since their first intervention 10 days ago. The MoF's Mizoguchi reiterated today that he will continue to watch the Forex market closely, saying that there was no change in their position that Japan will act if necessary.
Monetary officials remain concerned about a rising yen hurting the export led recovery. But if the dollar continues to trend lower across the board, the MoF will have to accept a lower USD/JPY level. USD/JPY support is seen at 124.35 and 124.00. Resistance is seen at 125.00.
The BoJ's Policy Board began its two-day meeting today and is expected to keep monetary policy unchanged on Wednesday with the current account target around 10-15 trillion yen. But the yen's 7% rise against the dollar since April is keeping downward pressure on inflation and could put the central bank under more pressure to boost liquidity further. Dealers are also on alert for another intervention from the Bank of Japan this week if the yen begins rising again