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The euro climbed to a new 27-month high of 98.16 in London trade today and the Japanese monetary authorities had to intervene at the 121-level in Asian trade to curb USD/JPY weakness. But further losses could be in store for the dollar this week if US equities continue to decline. Given that both the Dow and Nasdaq failed to rally from critical support around 9500 and 1500 respectively, from a technical perspective further losses are now expected over the short-term. This should only add to pessimism over US risks and weigh further on the dollar.
Meanwhile, another round of intervention by the Japanese today could be expected if USD/JPY falls below the 121 level again. The yen appreciated by nearly 2% against both the dollar and euro on Friday morning following the Bank of Japan's Hayami who said the recent fall in USD/JPY reflected the dollar's broad decline. This was the first sign of a departure from the fundamental argument that the yen should not strengthen and emboldened traders who had heretofore been weary of pushing the pair below 123.00.
But conspicuously missing from today's intervention effort was any mention by Japanese monetary authorities of fundamentals being out of line with a rise in the yen against the dollar. As recently as the June 4 intervention, both rapid moves in the yen and unrealistic fundamentals were used as pretexts. However, this time around officials only mentioned rapid moves, which means the Japanese may understand they will have to accept a lower dollar/yen rate than wanted.
Moreover, the dollar's rapid 3% decline in trade-weighted terms last week makes it politically infeasible to defend the rate on a fundamental basis which means the Japanese may have to accept a lower USD/JPY rate than they would like - possibly below the 120 level. This Wednesday's G-8 meeting in Canada puts added pressure on the Japanese to not be seen defending a certain USD/JPY level.
USD/JPY support is seen at 121.00 (intervention level) and 120.80 (Friday's low). Follow-up support stands at 120.45-50 backed by important psychological and technical support at 120.00.
The euro climbed to a new 27-month high of 98.16 in London trade today and a break of this high would target 98.50, followed by 99.00, 99.60 and ultimately 1.00. However, EUR/USD is becoming very overbought and a correction lower in the short term seems likely as well. Therefore look to see if today's high of 98.16 proves to be a top. If so, the pair could retrace back to around 97 cents and possibly 96.60 which marks both the 38% retracement of the 94.07 to 98.16 rally and the midpoint of the ascending channel. But further losses are not seen given the bearish nature of the dollar, and the upward bias in the pair remains.
Sterling also reached a new 17-month high of 1.5084 as the market dumped the dollar. Resistance at 1.5080, the 38.2% retracement of the rise from the 1.3680 low (June 2001) to the 1.7357 high (Oct 1998), limited the upside but support at 1.5050 followed by 1.50 is expected to hold.
The Swiss franc also reached a new 31-month high of 1.4970 as both US risks and continued geopolitical concerns weighed on the market. Gold prices also rose above $322 in the London fix this morning. Support is seen at 1.4950, 1.48 and 1.4750.
Last week's sharp decline in the dollar came on the back of renewed US equity losses. Technically, the key factor was the Dow and Nasdaq both failing to rally from critical support around 9500 and 1500 respectively and closed at 9,253 and 1440. More losses this week would only add to pessimism over US risks and weigh further on the dollar. This could very well prove to be the case as weak US data could rock the markets again this week. Potentially instigators are Tuesday's US consumer confidence figures, Thursday's gross domestic product and jobless claims numbers, and Friday's data on personal income and spending. The key variable will be whether US GDP figures for the first quarter show a downward revision, as expected.