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Dollar Holds Impressive Gains, Markets Eye New Highs
By ForexNews.com
Wednesday, July 16, 2003   10:47 AM ET

The dollar held onto its impressive overnight gains as US equities eyed new highs despite rising long-term rates. Markets have also failed to show concern for the ongoing difficulties faced in Iraq. Today, another US soldier was killed in a grenade attack in Baghdad, bringing the total combat deaths to 147, the same number as in the first Gulf War.

Greenspan Regards Risk, Shuns Caution

Stocks and bonds fell yesterday on Fed Chairman Greenspan's assessment of the economy, which was cautiously optimistic for a second half recovery but still promised to keep interest rates very low for a long time. Greenspan said the Fed could still cut rates if needed but did not think buying long term Treasuries would be needed. The long bond fell sharply, bring rates to a two-month high and well above their record lows in June. It was the largest single day selloff in bonds since 1996.

Mr. Greenspan also had an interesting assessment of the economy in which he regarded the recent yield grab by retail investors as a good thing, while caution on the part of CEOs was unhelpful. Many analysts cite interest in the more "speculative-grade securities" as a leading indicator of good times ahead despite the 4-1 insider-selling ratio during this latest rally. Perhaps this is why the Chairman said, "lower borrowing costs should lead to more capital spending, but as yet there is little evidence that the more accommodative financial environment has improved the willingness of top executives to increase capital investment." Yet overcapacity, lack of demand, and higher energy prices has continued to pressure profits. Therefore, if long term borrowing rates continue to rise, the consumer-cash-out-refinancing wave may slow down consumption in the second half despite bottom barrel low term rates and tax cuts.

Welteke Says No More Rate Cuts

On the other side of the Atlantic, the accommodative stance appears to have reached its end. Bundesbank and ECB member Welteke said today that rates are at historic lows and liquidity is sufficient, so a further rate cut would not help the economy. Bund futures nose-dived after Welteke's remarks backed up similar comments by ECB President Duisenberg. Meanwhile, as a counterbalance France clarified that it aims to continue respecting the "spirit" of the EU stability pact, but to take account of difficult conditions.

Snow Says FX should Float Freely

Today's reiteration of the "strong dollar" policy, but that FX rates should float freely failed to have the same effect on the dollar as it did when the trend was down two months ago. With the dollar index now up 7% over the past month, traders are not questioning the administration's commitment to the policy, but are instead focused on narrowing bond yield spreads and prospects for higher growth in the US come the second half.

EUR/USD

The euro nose-dived yesterday from its post ZEW high to a 2-month low of 1.1115 in London this morning. The euro again had difficulty as last week's inability to take out key resistance at 1.1375/1.14, will continue to weigh on the single currency and serve as key near term resistance. Support is now seen at 1.1075/50; resistance at 1.1160, 1.12 and the previous low of 1.1245.

USD/CHF

The dollar soared to a new 2-month high of 1.3940, just shy of key resistance at 1.4000/25. The dollar had reversed course from an overnight low of 1.3685 before stabilizing. Today's peak took the dollar above last week's 2-month high of 1.3788, which will now serve as support. Further backing is seen at 1.3750/30.

GBP/USD

Sterling added to its recent losses, falling 2 cents overnight to bring cable down 10 cents in the past month. The steep decline has been exacerbated by last week's decision by the Bank of England to cut rates another 25 bp to a new 48 year low of 3.5%. But today's surprising decline in unemployment claims to a two year low helped the pound hold the 1.59 mark. Nevertheless, cable has broken below 1.6010, the 61.8% retracement of the move from 1.5458 to 1.6904, which will now act as resistance. Below 1.59 eyes 1.5860/40 and 1.5750.

USD/JPY

The dollar rallied sharply against the yen as well from an overnight low of 116.70 to a session peak of 118.67. The dollar should be expected to remain well bid ahead of 117 due to recent reminders that Japanese officials will again intervene to support the pair ahead of the 117/115 level area. Yesterday's volatile price action also had many traders speculating that Japan did in fact play its hand in the FX markets. Therefore, currency traders will likely remain cautious of aggressively buying the yen due to wariness over intervention. The market showed little reaction to the BoJ upgrading its view on economy in their July report for first time in a year. Resistance is eyed at 118.70/90 and 119.40. Support seen at 118, 117.45.

AUD/USD

Aussie slipped back below the 0.65 mark overnight as dollar buying pressured the pair lower. As expected, yesterday's strength petered out ahead of resistance seen at 0.6620. Key resistance is now seen at 0.6484, which marked a spike low and reversal earlier this month as well as overnight. While the pair is trading heavy due to the steepness of the recent decline, losses may be limited to the previous low of 0.6425.

USD/CAD

The dollar broke out of yesterday's narrow range of 1.3730/85 and took out key resistance at 1.39 following the surprising move by the Bank of Canada to cut its overnight rate by 25 basis points to 3.0%. Many observers had expected the central bank to stay on hold after last week's positive employment report, but the BoC decided to follow the Fed's lead and take preventative measures against slowing growth. In the statement accompanying the interest rate decision, the central bank noted that growth expectations have deteriorated rapidly while inflation has subsided, creating a suitable environment for a more accommodative stance. Moreover, the Bank repeated its concern over the negative repercussions wreaked on exports from the Canadian dollar's swift appreciation.

USD/CAD reached a new two-month high of 1.3973 this morning. The breach above 1.3935, which marks the 38.2% retracement of the fall from 1.4947 to 1.3306, opens the path to 1.4070, located on the resistance line extending from the 1.5798 peak through the 1.4941 high. A subsequent ceiling is seen at 1.4125 -- the 100-day moving average and the 50% retracement of the aforementioned decline. Failed to execute script: Http Status Code = 502