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Once again US stocks acted as the catalyst to a sharp turnaround in the US dollar, as the bleak corporate earnings outlook in technology stocks overcame flashes of positive earnings guidance from large cap stocks.
Propped by yesterday's 230-pt rebound in the Dow and an acceptable showing from 2 sets of US economic data, the dollar had strong US morning session, holding the euro at a full cent and half below yesterday's 28-month highs of 98.16 and the pound by a whole cent at the $1.4980 figure. Even stocks started the morning on a high note, with the Dow at some point rallying by more than 100 pts. But the NASDAQ didn't share the Dow's enthusiasm, leading the decline in all major indices and dragging them to their lowest closing levels in 9 months.
EUR/USD leapt by 1.2 cents overcoming the 97.30-cent resistance to hit 97.87 cents. The euro rally was especially highlighted by the fact a sell-off in Wall Street shadowed an unexpected decline in the closely watched German Ifo survey on business sentiment to 91.3 in June from May's 91.5. Ifo's economist Gernot Nerb said the drop was not unusual in a recovery and that the broad growth trend remains intact. Nerb added that the economic turnaround has already been reached in Q2 and that the recovery will accelerate in the second half of the year. He also praised the rising euro and the advantages it has on low inflation. Separately, Hans-Werner Sinn, the Ifo's chief said he forecasted 2.6% growth for the US and 0.9% for the Eurozone for the year, indicating that the forecasts were based on euro reaching parity with the dollar. EUR/USD should be expected to face downward pressure at the 98-cent figure, above which it is deemed overbought from a Relative Strength measure.
ECB Chief Economist Issing from his part said that the Bank pays a lot of attention to exchange rates in when conducting monetary policy decisions and that price stability must remain core the task of central banks. He also said that the implementation of the stability pact facilitates the quest for price stability. German top govt adviser Siebert "Wiseman" said the strong euro was no threat to German exports, while the advantages of a strong currency on the ECB's ability to maintain interest rates on hold for the time being.
EURUSD and GBPUSD started off with unusual trend in early morning US trading, moving in opposite direction, with the former closer to its session low and the latter 20 pips under its high of the day. But both rates headed up when US stocks took the plunge, pushing cable back above the 1.5050 to 1.5072. But sterling continues to find difficulty in breaching the key resistance of 1.5084, which is the 38% retracement of the decline (on weekly chart) from the 1.7375 high (Oct 1998), to the 1.3680 low (June 2001). A break above it faces pressure at the 1.5100, forming a double top formation with the last year's January high. Support seen at 1.4955-60 backed by 1.4880.
USDCHF joined the dollar sell off despite statements by SNB Chief Jean Pierre Roth expressing his optimism that the currency's troublesome allure to appreciate at times of instability in other regions may start to wane in the near-term. The currency has risen 9% this year and, was the first to appreciate against the dollar after Sept 11 and the last to start falling against the dollar 3 months later when the dollar neared 15-year highs in February. The Swiss monetary authorities have long been complaining of the negative impact that the strengthening franc has had on exports, especially during a global economic slowdown. Roth said the franc's luster would probably start to wane because part of its momentum will be transferred to the expanding European economy, namely the Eurozone currently with its 12 nations and the European Union (E12 + UK, Denmark and Sweden).
While failing to revisit yesterday's 31-month lows of 1.4975, USD/CHF did end up losing a full 2 centimes to hit 1.4992. A breach of 1.4975, is seen calling up 1.4860-- 61.8% retracement of the rise from the 1.2747 low (Oct 98) to the 1.8307 high (Oct 2000).
USD/JPY was the most stable of the major dollar pairs, hovering inside the 121.50-90 range before slip sliding towards the 121.30 low. Japanese officials finally began mentioning actual rates when voicing their concern with the recent bout of yen strength. Particularly, the chief of Japan's trade ministry Hiranuma expressed the difficulty for Japanese exporters to live with a USD/JPY rate lower than 120. As the dollar begins to revisit the 121.20s, markets could expect another intensified rhetoric from Japan, that could materialize into real intervention near the 120.80-90s. Any intervention should dollar gains limited to 122.65-70.
Today's release of June Consumer Confidence in the US fell to 106.6 from a revised 110.3, but still beat forecasts of a drop to 108. The other positive aspect from the morning's was the May report on existing home sales figure which although fell by 0.3% to 5.57 mln units, it still registered the 4th highest number on record. In terms of dollar prices, home sales hit a record high of $154,000.
US stocsk closed at new lower lows for the year with the Dow tumbling 155 pts or 1.67% at 9126, NASDAQ plummeting 36 pts or 2.5% to 1426, and S&P500 falling 16 pts or 1.7% at 976.
Although the dollar did respond positively to the rally in US equities yesterday and earlier today, its rebound was not as sustainable and intense as that in equities, suggesting that the rebound in socks is exaggerated or, not sustainable. As the quarter sets to close, US companies will undertake the usual window dressing typical of ends of quarters to bolster their balance sheets for the end of the reporting periods. This naturally has an upward impact on stocks. But pundits are conscious that such rally is only temporary and is not sufficient in reversing the 6-month old sell-off in stocks.
Tomorrow's release of the May durable goods report is expected to have risen by 0.1% to 0.5% from 0.8%, while durable goods excluding transportation items is seen up 1.0% from 3.5%. The drop in core orders that exclude aircrafts and defense is expected to be the main reason to the easing in orders. Some private forecasts see the May headline figure deteriorate to a decline of as much as 1.0%. If we do see a decline, than that would convey the message that companies remain hesitant in their capex plans, which could subject the dollar and the markets to renewed damage.