The dollar slipped to its lowest levels in nearly three weeks against the euro and yen on Wednesday as investor concern about high oil prices and their impact on the U.S. economy kept the greenback on the defensive. U.S. oil prices held above $41 a barrel as markets waited to see if an expected rise in U.S. oil stocks would be enough to meet peak holiday season demand for gasoline. Analysts said the lead against the dollar was coming from the yen and higher-yielding currencies like sterling, with investors questioning whether high oil prices would harm U.S. growth prospects and prevent the U.S. Federal Reserve from raising interest rates from a 46-year low of 1.0 percent. "The dollar still seems to be under pressure from oil but also on technicals," said Adrian Schmidt, market strategist at Royal Bank of Scotland Financial Markets.
"There are a lot of long-term dollar bears out there and there are some technical-related buyers of euro/dollar and sellers of dollar/yen." By 1145 GMT the euro had pared gains to $1.2110 after peaking at $1.2143 earlier. The dollar was 0.25 percent weaker at 111.46 yen after touching 111.25, its lowest since early May. The Swiss franc got an unexpected lift from the KOF leading indicator, which gauges the expected performance of the Swiss economy six to nine months out. The indicator rose more than expected, sending the franc half a centime higher against the dollar and to the day's highs against the euro .
FOCUSING FURTHER OUT
In the absence of major U.S. indicators this week the market was starting to look to next week's monthly jobs report for clues as to whether the economy, and the labour market, is strong enough to warrant a U.S. interest rate hike in late June, as the market has been expecting. "The big issue is the moderation of rate expectations in the United States. We have seen this in effect now for several days," said Steven Saywell, currency strategist at Citibank in London. "We are seeing the market being less aggressive in pricing higher interest rate expectations. So the market is less comfortable buying the dollar."
Second tier U.S. data due later include April durable goods orders at 1230 GMT, forecast to fall 0.2 percent versus a 5.0 percent rise in March, and new homes sales at 1400 GMT. U.S. oil stocks data is due at 1430 GMT and forecasts are for gasoline supplies to have risen modestly by 1.2 million barrels for the week ending May 21. The U.S. is the world's largest importer of oil but analysts say other major economies like Japan and the euro zone would also suffer in an environment of rising fuel costs. The difference for the U.S. is its current account deficit, which is around five percent of gross domestic product and requires $1.5 billion a day in foreign inflows to fund the gap, making investors edgy about the dollar's prospects in a climate of uncertainty.
LEADING THE CHARGE
After moves up of more than one percent against the dollar for the high-yielding Australian dollar and sterling on Tuesday, the pound and the New Zealand dollar took up the baton on Wednesday. "Rate hike expectations in the United States are being scaled back and this is encouraging investors to move back into high-yielding currencies such as sterling," said Shahab Jalinoos, senior currency strategist at ABN AMRO. The pound climbed to a six-week high of $1.8200 , the New Zealand dollar was up 0.5 percent and the yen edged higher to a key resistance area between 111.10-30 which represents the dollar's recent uptrend. The benchmark Nikkei stock average <.N225> ended up 1.73 percent at 11,152.09, helping to lift the yen, and data showed Japan's trade surplus rose 30.3 percent in April from a year earlier. In the euro zone data was less bullish. The region had a current account surplus of 12.4 billion euros in March but it also had a net 23.9 billion euros of direct and portfolio outflows after an inflow in February. The euro showed no reaction to the data.
Consumer sentiment in the region's largest economy, Germany, was set to deteriorate slightly in June, according to GfK market research group, while Italian business confidence fell in May after hitting its highest level in nearly two years in April.///