The yen was sharply higher while the dollar sunk like a stone in Tokyo trade as Asian dealers disposed of long dollar positions after it failed to add to last week's gains on Monday. Despite upbeat housing news from the US, further gains on Wall Street, and a retreat in the Nikkei, traders instead flocked to the yen and Australian dollar. Dealers were reportedly fearful of a hawkish speech on Iraq from US Vice President Dick Cheney overnight and key US economic data due later today. EUR/USD reached a session high of 97.70 while USD/JPY fell to a low of 118.75. The data calendar for Europe is clear today, but all eyes will be on key US durable goods and consumer confidence, which are both expected to edge higher.
US Vice President Dick Cheney again called for regime change in Iraq, saying that the US cannot deal with the situation through a policy of containment. Cheney stated there was no doubt Iraqi leader Saddam Hussein was in possession of chemical and biological weapons and was determined to add nuclear weapons also. He also insinuated the Bush presidency would be a failure if he did not manage to bring about a change of regime in Iraq. Cheney discussed America's plans for Iraq following a regime change, stating that the US wanted to see the country remain intact territorially and governed by a democracy. Oil prices edged higher and the dollar lower after the speech as a pre-emptive strike without a coalition is seen as an albatross for the US economic recovery.
Failure for the dollar to penetrate key chart levels likely lead to profit taking in thin trade ahead of key US data today. EUR/USD rose to a session high of 97.70 which happens to mark current trendline resistance from the 96.65 low last week, as well as trendline support turned resistance from the 85.65 low this year. A move beyond 97.75, the 62% retracement of the 98.45-96.65 decline would put the euro bull trend back on track. But the real test will come after the Labor Day holiday when activity picks up again. This will give a more accurate indication of market sentiment for the dollar. Support is seen at 97.30 and 97.00.
Meanwhile, traders will also be anxious to see Wednesday's key German Ifo which may fall for a third consecutive month in August. Recall that the German think tank ZEW's August expectations indicator plunged to 43.4 from 69.1 in July, posting the sharpest drop in two years and reflecting a halt in economic recovery. The strong relationship between Eurozone GDP and German Ifo means a further decline could put the burden back on Europe after traders almost exclusively sold the dollar this year.
The best indication of a possible bull run in the dollar will be the market shrugging disappointing data in the US while punishing weak Eurozone data. Such an event would be a clear sign of sentiment change favoring the greenback. But the reverse could also be true. Therefore, economic data this week will take center stage with the dollar likely reacting to the direction taken on Wall Street. Following five consecutive weeks of gains in equities, traders will look to see if renewed confidence and risk taking can help drive both US asset markets and the dollar higher.
USD/JPY sold off sharply to a session low of 118.75 after it showed difficulty breaking above 119.85 overnight following a 350-pip gain from the August 14th low at 116.30. The dollar fell below support at 119.30, the 38% retracement of the 117.70 to 120.30 rally. And a break below 118.70, the 62% retracement of the same move would open the way for a decline towards 117.70.
GBP/USD also held above key support at 1.5165, which marks the 38% retracement of the 1.4038-1.5864 rally. Below 1.5165 would have shown a clear break of a head and shoulder technical formation, clearing the way for 1.4950, the 50% retracement of the same move and trendline support from 1.4080. But instead, sterling rebounded from this level, climbing to a high of 1.5280 before backing off. Further resistance is seen at 1.53 and 1.5330. Support is eyed at 1.5200/10 and 1.5165. //www2.forexnews.com