The dollar was higher in early trade after Iraq's willingness to readmit UN weapons inspectors decreased the possibility of full blown war in the Persian gulf, dealers said. But whether the Iraq issue is resolved remains to be seen, they added. Sonja Martens, currency strategist at Dresdner Bank said investors scaled back the war risk scenario after Iraq's climb-down but the risks have not completely disappeared. "What we have is a short term relief rally on the dollar," she said.
The Iraq situation is far from solved. Iraq's move may simply be a delaying tactic while the US's goal is for a regime change, she noted. Given this backdrop it will take a significantly lower than expected reading in US August industrial production to dent the dollar, she said. "It will take more than a run of soft data to damage the dollar just now," she added. According to an AFX News poll, economists see industrial output rising 0.1% in August following a 0.2% rise in July.
The yen was under pressure as the Bank of Japan policy board's two day meeting got underway. Some expect further monetary easing. "Dollar-yen is looking overbought but the BoJ meeting is likely to be another disappointment," Martens said. The euro had its own problems. An important leading indicator, the German ZEW business sentiment survey, scheduled for release this morning is expected to come in very weak, suggesting an equally weak reading in the next German Ifo index - a key confidence barometer. "A weak reading in the ZEW could be used as a reason to sell the euro," Martens said.
With the German elections set for this weekend and what can only be termed as a 'bail-out' for Mobilcom, foreign investors have again started questioning the government's commitment for reforms, Martens said. Sterling was a touch weaker against the dollar but today's UK inflation are expected to have little impact. //www.ananova.com