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After weeks of dogged devotion to the melodramatic sentiments on Wall Street, the dollar disconnected itself from equity movements today. Whereas U.S. stocks switched gears and drifted into negative territory in afternoon trading, the dollar held on to overnight gains and surged to session highs vs the major currencies.
The Dow opened optimistically with gains near 100 points during morning trading but was battered by another afternoon sell-off. The index closed lower by 82 pts or 1% at 7702. Weakness in tech stocks gave a staggering blow to NASDAQ, dragging the index down by 53 points to accumulate a 4% loss at 1229. Despite the gloomy performance of U.S. equities, the previously oversold dollar continued to dominate the major currencies during the sell-off.
In an interview today, ECB Chief Economist Otmar Issing reiterated the central bank's wait-and-see stance on monetary policy in light of the the uncertainty in U.S. markets and inflationary pressures in the Eurozone. Echoing his colleagues, Issing expressed concern over whether Eurozone nations will adhere to their pledges to balance their fiscal budgets by 2004. The ECB views the Stability Pact as crucial in holding inflation within the 2% target. France, Germany, Italy, and Portugal have all come under scrutiny for not reigning in their budgets, which could undermine the ECB's efforts to fight inflation since the former three contribute more than 70% to the Eurozone economy. And while Issing welcomed the euro's appreciation as an additional inflation fighter, he pointed out that the benefit is only fractions of a percentage point.
Euro tumbled below parity overnight to 0.9845, rebounded to a temporary foothold around the 99 figure in morning U.S. trading, only to plunge near the session in the afternoon. The euro has been overbought recently in anticipation of the break above parity, and the ensuing short covering by traders may have contributed to the euro's precipitous drop today. Interim support for EURUSD is seen at 0.9850, followed by a firmer base at 0.9780. Immediate resistance for EURUSD is viewed at 0.99, which is the 62% retracement of euro's rise from 0.9713 to 1.0201 and today's consolidation point. Subsequent resistance eyed at 0.9940, 0.9970/80 and 1.0085
USDJPY also bounced off recent lows to a high of 117.91. While statements by Japanese officials supported the dollar, the strengthening dollar across the board provided the main momentum, since recent intervention hints by MoF and BoJ officials were hardly effective. Support for USDJPY starts at 117.30, the 38% retracement of the downward trend from 120.31 (July 7) to 115.50 (July 16). The 17-month low of 115.50 should provide a firm floor for additional declines. Resistance is seen at 117.90, which is today's low and also the 50% retracement of the aforementioned move, followed by 118.50 (62% retracement).
According to the British economic think tank NIESR, the plunge in British equity prices (FTSE 100) to 6-year lows are unlikely to hurt economic growth. The pound's deprecation against the euro will bolster British exports to the Eurozone, thereby offsetting equity losses. Moreover, house prices have soared in Britain, bolstering homeowners' wealth and compensating for the decline in stock prices. The NIESR also said that the BoE will likely wait for markets to calm down before implementing a interest rate hike.
Cable tumbled more than a cent this afternoon to 1.5557 before edging up slightly near 1.5602. Upside movements will face selling pressure at the 1.57 resistance/support, followed by key resistance at the 26-month high of 1.5820. Further upward momentum could buoy the currency up to 1.5850, the 26-month high reached last week. Support found at 1.5616 then 1.5580, the 50% retracement of the 1.5143 (July 5) to 1.5850 (July 18). Follow up resistance is eyed at 1.5480/90.
Swiss National Bank board member Niklaus Blattner said on Tuesday that monetary policy was neutral at the moment, which indicates that interest rates could go in either direction or remain unchanged in the near future. Since economic indicators from European countries remain ambiguous, the SNB is also observing the ECB's wait-and-see stance.
USDCHF soared to a session high of 1.4776 vs the Swiss franc this afternoon. Upside capped at 1.48 and 1.4860. Support is seen at 1.4630-35 then 1.4575-80.
Coming up tomorrow, markets will look to the release of June inflation data for France at 2:45 AM (EDT), expected to show a minor increase from last year but unchanged from May. Germany's producer's price index had indicated a slight drop in prices, and if French numbers come in favorably (low inflation), anxiety over inflationary pressure in the Eurozone could subside, buying the ECB more time before raising interests rates that could undermine growth. Tomorrow's data also includes UK July CBI monthly total orders, CBI quarterly business confidence survey, Italy June business confidence and retail sales, and Japan June retail sales.