9 October 2002, 16:53   Dollar Remains Firm, Yen Whipsaws as Reform Looms

The dollar held onto recent gains against the European majors and rebounded sharply vs the yen in London trade. JPY fell across the board after the Japanese government left its economic assessment unchanged but warned about rising risks. Japan's FSA chief Takenaka said he wants the Bank of Japan to cooperate in various fields to tackle deflation and BoJ Governor Hayami was quoted as saying the central bank would reveal its plan to tackle the NPL problem in a matter of days. The back-to-back statements added to the uncertainty surrounding plans to clean up Japan's banking sector just as global economic growth is slowing and Japan's export sector is jeopardized.
USD/JPY bounced to a session high of 124.31, but rumored option protection at 124.50 held back further gains and profit taking took it back to the 124 handle. In early London trade the pair dipped below the 124-handle to a session low of 123.80. But downside pressure was relieved by further falls in the Nikkei which slipped below 8,500 for the first time in 19 years today. Follow up support is seen at 123.50 and 123. Resistance is seen at 124.00, 124.30 and 124.65, Tuesday's 4-month high. The dollar soared to its highest level in almost 4 months at 124.65 on Tuesday after Mr. Sakakibara, aka Mr. Yen, questioned the potential impacts of the government's reform proposals, saying the aggressive disposal of non-performing loans could intensify deflationary pressure by causing bankruptcies and more unemployment. Tuesday's high was just shy of the 50% retracement of the decline from 133.81 (April 1) to 115.50 (July 16). Further resistance is seen at the 125 handle, followed by 125.32, the 50% retracement of the fall from 135.15 (February 1) to 115.50 (July 16).
Meanwhile, the euro regained the 98 cent level in London but remains stuck in a tight range of 97.50-98.50. Only a break from these key support/resistance levels would give the pair much needed momentum. However, rangebound trade appears likely given the uncertain economic environment in the US and Eurozone. Key retail sales and consumer confidence data on Friday will likely give the dollar better direction.
Weighing on the euro this morning are concerns that France might try to stray from its budget agreements. On Tuesday, French FinMin Mer caused a stir when he refused to agree on cutting France's budget deficit by 0.5 per cent in 2003. Earlier this year France won an extension to 2006 for when it had to bring its budget deficit to zero, which raised serious concerns about the viability of the Growth and Stability Pact. Moreover, Brussels is expected make a formal reprimand, which if endorsed by other FinMins would indicate a breakdown from within the E12 on budgetary discipline. The EU said today it may officially warn France from getting to close to budget limits.
In addition, the euro was not helped by ECB President Duisenberg who said on Tuesday in a speech to Parliament that monetary policy was appropriate. Despite his admission that global growth prospects have deteriorated, Duisenberg gave no inclination that the ECB would lower rates when it meets on Thursday. But the market is still pricing in a cut by December and remains at odds with the central bank's stance on rates.
Also weighing on the euro this morning was a 2.5% fall in the DAX despite overnight gains on Wall St. German banking shares led the decline as falling earnings and high costs have taken their toll on the industry. So much so, Buba's Meister said today he can not rule out more German bank failures in "isolated cases, although he sees the sector as stable.
Sterling slipped below support at 1.5520, the 50% retracement of the 1.5280-1.5720 advance after a sharp 1.5 cent fall on Tuesday put it in a weak position. Contributing to much of that decline was a large rebound in EUR/GBP after traders failed to take out key support at 6.50 last Friday. The euro has since gained over one percent to a session high of 63.20 today. Cable support seen at 1.5520, 1.55 and key backing at 1.5450. US equity futures worsened in London as news circulated that Hewlett Packard under does not expect a turnaround in the technology sector next year. Dow futures fell to -80 by midday London trade and negative earnings surprises today could weigh. Yahoo! is the most widely known company reporting today expecting 4 cents per share. ///www.forexnews.com

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