www.forexnews.com // Deepening violence in the Middle East left no chance for US stocks and the dollar after a second suicide bombing rocked Jerusalem in 2 days. More than 25 people were killed in the two attacks and over 90 were injured. Adding to tensions in the region were reports of Israeli helicopters firing missiles in Gaza City on Wednesday night.
The dollar tumbled to fresh 17-month lows against the euro and the pound, while plummeting to a 31-moth low against the Swiss franc and hitting a 2-week low vs the yen. The dollar's slump against the European majors began early as Wednesday morning in Asian trading, before intensifying in mid morning European trade. An intraday rally in Wall Street in late morning carried the dollar back to the day's mid-rang, before selling ensued in stocks again, sending the greenback towards its lows of the session.
After a 3-hour retreat in US trade, EUR/USD rebounded to 95.70, just 10 pts short of its 95.80 cent high.
The euro has now pushed up 12% against the dollar from its 85.60 cent low of the year in February. Most notable about this rise is its relative sustainability, lasting for 4 months, as opposed to previous rallies of (12% in 2 months last year) and (14% in 2 months in 2000). The currency's mettle will be again tested as it approaches the crucial technical level of 96 cents, which is the 38% retracement of the decline from the all time high of 1.1845 cents at inception in January 1999 to the all time low of 82.27 cent in October 2000.
The euro's technical run us also confirmed by the validation of a pennant formation, underlined by the 94-95-cent consolidation during June 7-14, resembling the consolidation in the 3rd week of May and the bullish flag in the second week of May.
Cable's extended its gains to fresh 17-month highs at $1.4948, mounting an impressive 7% rally in just 7 trading days. The medium-term resistance is still seen at 1.5080, which is the 38% retracement of the rise from the 1.3680 low (June 2001) to the 1.7357 high (Oct 1998). Downside seen limited at 1.4880 backed by 1.4835-40.
In an apparent move to quell further pound strength, UK government officials broght up the EMU-issue, a topic that automatically weighs on the pound due to the required convergence of British economic variables with those of the Eurozone. Senior UK Treasury official Ed Balls said today the government could finalize its assessment of the 5 economic tests on EMU membership as early as June of next year 2003. Although he said it was important to take into account sterling's exchange rate when assessing EMU membership, Balls noted that it wasn't a hidden sixth test .
The UK is being extra cautious not to repeat the mistake of the 1990 when the Conservative government took the pound to the Exchange Rate Mechanism in at a fixed rate of 2.95 Deutschmarks to the pound, a price designed to contain inflation, rather than shoring up domestic manufacturers' competitiveness. But currency speculators deemed the pound too expensive for the weak UK economy, prompting the currency's collapse out of the ERM in September 1992. Growth fell by 4%, unemployment rose by over a million. Thus, the UK prefers to lock sterling into a cheaper rate against the euro, preferably in the 66-68 pence range.
The Swiss Franc leapt by over 1.5 centimes against the dollar for the second consecutive day, to reach a 31-month high of 1.5359. The rally in the Swiss currency was hastened by another 1-bp rise in the Swiss call repo rate. Currency-conscious Swiss National Bank made no remark about the latest rally in the currency. Today's break below the 1.54 level triggers the 1.5300-50 support territory, which is the trend line support (weekly chart) extending from the 1.6108 (June 2000) thru the 1.5895 low (Jan 2001) and 1.5590 low (Sep 2001).
Any cautiousness ahead of Japanese intervention to stem yen strength stood no chance in halting the USD/JPY decline as dollar selling remained the order of the day. But now that the pair has broken below 124 level, we should expect increased interventionist rhetoric from Japanese officials, especially that all 5 interventions by the BoJ this year occurred at the 123 handle. Cautiousness will be stepped up at 123.55-60 backed by 123.25-30.
On the news front, the only release was a downward revision in US factory orders rev to 0.6% from 1.2%. and in April durable goods orders to 0.8% from 1.5%.
A late wave of selling in US stocks sent the Dow to a 144-pt drop to 9561, NASDAQ - 46 pts at 11496 and S&P down 17 pts to 1019. Tomorrow's barrage of US data begins with the April trade figures, expected to see the deficit widen to about $33 bln from $31.6 bln, with the a negligible rise in exports weighed by declining orders for aircrafts, while higher oil prices in April accounting for the bulk of the rise in imports. The trade report for Q2 is expected to show the deficit rising to 4.3% of GDP from 3.9% in Q1, which is likely to trigger further concerns of a swelling trade gap and highlight the US's increased difficulty to finance its trade gap as its stock markets continue to falter. Also at 8:30 AM is the initial weekly jobless claims expected to slip to 385K from 390K, remaining under the 400K level for the third consecutive week suggesting an improved trend in claims. May US Leading Indicators Index is expected to show a rise of 0.3% after April's 0.4% decline. The rebound is largely attributed to the string of 4-week back-to-back improvement in jobless claims and pick up in money supply. Although the April release did hurt the market, it is unsure whether a rebound tomorrow will be sufficient in supporting stocks and the dollar. The consensus estimate for tomorrow's June release of the Philadelphia Fed Survey on manufacturing and business (due at noon) is expected to rise to 12.4 from 9.1 with forecasts raining from 10 to 15. If the figure hits the high end of forecast at 15 as , it would be the best number since February. But markets are expected to pay little heed to the report since it is not expected to cast a chance on the Fed's mind on interest rates.