Th edolalr edged higher on Wednesday after South Korea’s central bank denied it was reducing its dollar exposure following Tuesday’s remarks from stating its plan to diversify its currency reserves. The central bank said it had no plans to adjust with the proportion of its $200 billion in currency reserves, asserting that:” The plan meant that the central bank would diversify reserves more into non-government bonds and did not mean that it would sell current dollar holdings for other currencies." The central bank’s report to parliament on Monday said the bank would diversify its reserves away from US treasury bonds into higher yielding debt and into non-dollar currencies. The retraction helped the dollar bounce from Tuesday’s multi-week/month lows. Interestingly, Japan also denied it had any plans to expanding its euro holdings.

The minutes from the FOMC February meeting showed the US central bank kept the door open for further rate hikes as it saw the Fed funds rate still below the level needed for stable inflation, while several officials saw upward inflation risk particularly in the event of further dollar declines. Some officials also noted “considerable uncertainty” on productivity and output gap.

US CPI rose 0.1% last month after holding steady in December, while the core index, excluding food and energy items, once again rose 0.2%. The report relieved any fears of a large increase following Friday’s release of the 0.8% jump in core wholesale prices.
Oil prices remained at their 4-month highs above the $51pb, while Treasuries were little changed with the 10-year yield at 4.26%. US stocks staged a partial comeback after yesterday’s dollar/oil inflicted damage.

Euro drifts to $1.32

The euro stabilized on a combination of renewed disappointment in Germany’s IFO business survey and the retraction from South Korea’s central bank. Germany’s February IFO index unexpectedly dropped to a 3-month low at 95.5 this month from January’s 96.4, while the business expectations index fell to 96.4 from 96.8. There will be business confidence figures from France on Friday.

Euro’s backed off to the $1.32 level—50% retracement of the 1.3664-1.2730 drop, which is followed by $1.3170 and 1.3120. Key support stands at 1.3089—38% retracement of the said move. Upside starts at 1.3270, followed by 1.3310—61.8% retracement of the said move

Yen gives back ½ of Tuesday’s gains after remark

USDJPY rose back to the 105 level after the head of Japanese finance ministry’s FX markets division Masatsugu Asakawa said: “we have no plan to change the composition of our currency holdings…and we are not thinking about expanding our euro holdings” Nonetheless, it’s worth mentioning that Japan’s Finance minister Tanigaki said last earlier this month Japan had to exercise much care in managing its currency reserves, totaling $845 billion ads of end of last year.

The yen pulled ½ a yen to 105 after the comments from Tokyo. Resistance capped at 105.30, followed by 105.50 and 106. Support starts at 104.27—50% retracement of the 101.66-106.84 move. Key foundation stands at 103.70-- trend line from 101.66 low thru the 102.35 low.

Sterling edges towards $1.9030

Cable stabilized around the $1.9080s as the US dollar benefited from Seoul and Tokyo’s FX retraction. The Bank of England surprised the markets when it released the minutes of this month’s meeting showing the Committee voted 8-1 to leave rates unchanged at 4.75%, with the surprise vote for a 25-bp rate hike by Paul Tucker. The Committee stated the balance of risks to inflation forecast remained sufficiently on the downside. Traders still allow room for a rate hike this quarter.

Cable faces at $1.9152—the 61.8% retracement of the move from the $1.9549 high thru the $1.8507 low. Key pressure stands at $1.92. Support starts at $1.9030, backed by $1.8970. Support stands at 1.9030, followed by 1.8950.

At 8:30 AM US January Core CPI (exp 0.2%, prev 0.2%) US January CPI (exp 0.2%, prev 0.2%) At 1:40 PM US Atlanta Fed’s Guynn Speaks At 2:00 PM Minutes of February FOMC Meeting At 4:00 PM Canada FinMin Goodale Speaks

The dollar regained its composure as sellers of the currency took a breather overnight, recovering to 1.32 against the euro and 104.85 versus the yen. With Japan and South Korea both quelling speculation over the possibility of forex reserve diversification by their central banks, the heavily sold greenback found some reprieve in early Wednesday trading. Yesterday’s sharp sell-off was triggered by reports of South Korea potentially diversifying currencies in its massive $200 bln foreign exchange reserve portfolio. The fx volatility that ensued prompted Asian central banks to ease fears of an exodus from their US dollar holdings, as the Bank of Japan and Bank of Korea both expressed no desires to diversify its reserves by buying euros.

Traders will continue to keep a close watch on rising oil prices, with crude oil climbing to its highest level in 4-mths above $51 per barrel. Also in focus will be economic data slated for release in the coming session, including US January CPI and the February FOMC minutes. The January consumer price index is forecasted to remain unchanged from the previous month steady at 0.2%.

Sterling Up Slightly on BoE Minutes

The release of the Bank of England’s February minutes surprised markets with one unexpected vote in favor of a 25-bp rate hike. The MPC voted 8-1 in its February 9-10 meeting to hold interest rates unchanged at 4.75%, since most members viewed the balance of risks to inflation forecast remaining sufficiently on the downside. However, MPC member Paul Tucker voted in for a 25-bp hike, saying that although risks to inflation were skewed to the downside, they were still less than November therefore justifying a rate increase. Most members deemed that for the most part, risks to the central forecasts for GDP growth and CPI remained on the downside.

Following the release of the minutes, sterling received only mild support, edging up above the 1.91-level. Cable will face resistance at 1.9130, followed by 1.9160 and 1.92. Subsequent resistance is seen at 1.9240, followed by 1.9265 and 1.93. Support starts at 1.8980, followed by 1.8950 and 1.89. Additional floors will emerge at 1.8870, backed by 1.8840 and 1.88.

Euro Retreats toward 1.32

Germany’s February IFO index unexpectedly fell to 95.5, compared with forecasts for a rise to 96.8, and down from 96.4 in January. The business expectations index fell to 96.4, versus a revised 96.8 a month earlier, while the current conditions index dropped to 94.5 from 95.3. The IFO said manufacturing

The euro failed to further extend gains above the session high of 1.3274, instead retreating back toward the 1.32-handle. Meanwhile, resistance is seen at 1.3240, followed by 1.33 and 1.3335. Additional ceilings will emerge at 1.3375, backed by 1.34 and 1.3440. Support starts at 1.32, followed by 1.3180 and 1.3130. Subsequent floors are seen at 1.31, backed by 1.3030 and 1.30.

Dollar/yen Recovers

Dollar/yen climbed back up to 104.86 overnight, with resistance starting at 105, followed by 105.60 and 106. Additional resistance is seen at 106.30, backed by 106.70 and 107. Support starts at 104.60, followed by 104.20 and 104. Subsequent floors are eyed at 103.80, followed by 103.50 and 103.

The dollar damage was extended into the US session after the beating ensued in the Asian and European session when a report a Reuters story Monday quoted sources from South Korea's central bank stating that the bank would look at reserve diversification out of the dollar. The initial report had little impact on the US dollar before a subsequent story from Bloomberg indicating Korea’s diversification into high yielding currencies prompted intense dollar selling. The dollar lost 1.5%-1.7% across the board, slumping to 12-month lows against the Aussie, 6-week lows against the euro, 4-week lows against the Canadian dollar and 3-week lows against the yen.

The fact that such a generic remark from the South Korean central bank signifies that global central banks’ currency shifting is an unavoidable reality at the expense of the dollar. Since an expected revaluation of the Chinese yuan next year will allow Asian currencies to appreciate against the US dollar, central banks are moving ahead of the move in order to minimize any currency losses to their extensive dollar portfolios once FX markets react to China’s eventual decision.

For more detailed analysis on today’s dollar moves, please see Articles & Ideas in Forexnews.com.

Markets showed little reaction to the release of the US Conference Board's consumer confidence index at 104.0 after an upwardly revised 105.1 in January as the dollar’s slide was the overwhelming market event.

Oil hit surged by more than $3 per barrel to a 4-month high of $41 pb on a combination of cold weather in Europe and the ramifications of resurging violence in Mideast on oil. Meanwhile, gold prices shot up by $7.40 to close at $435.80 an ounce in New York.

President Bush’s fence-mending trip to Europe is seen as a diplomatic trip to simply strengthen relations between the US and the European Union. While the US and European leaders can easily extol their points of agreements as far as sounding off their commitment to combating terrorism and instilling stability in the Middle East, their sources of disagreements and tensions remain all too apparent. Issues such as the EU arms embargo to China, Korea’s compliance with nuclear treaties and increased pressure on Iran are some of the potential sources of differences and conflict of interest.

On Wednesday, traders start off with Germany’s February IFO survey on business expectations, expected to edge higher, followed by the release of the minutes of this month’s Bank of England meeting. The US February CPI figures will be viewed with cautiousness following the higher than expected core PPI seen last week, which might suggest that inflationary pressures are spilling onto the making it to the pipeline. But just as important are the minutes of the February FOMC meeting, which may convey any hits among members on a possible pause in the tightening sometime in the near future, or whether to accelerate the rate hikes.

Yen soars on rude awakening

The yen soared to a 3 week high against the dollar after S. Korea’s comments, eroding all post GDP losses and proving that the dollar’s woes are more potent in FX markets than cyclical considerations. Support starts 103.70-- trend line from 101.66 low thru the 102.35 low. Support follows at 103.60 and 103.30. Resistance caped at 104.27, followed by 104.80.

Euro soars past 50% retracement of year’s move

Euro’s 2-cent rally knived through the $1.32 level—50% retracement of the 1.13664-1.2730 drop, to hit a 6-week high of $1.3268. A breach above the 1.3290 high, calls up 1.3310. Support was lifted to 1.32, backed by 1.3117. the soaring EURJPY pair level finally reversed courtesy of the yen’s jump.

Aussie flexes high yield muscle to 12-month high

Aussie soared to 12-month high when it broke the 79.44 barrier when South Korea’s central bank hinted at moving towards higher-yielding currencies in its quest to diversify its $200 billion FX armory. Interim resistance starts 79.70 cents followed by 80 cents, the trend line resistance from the 82.14 high thru the 80.02 high. Support starts at 79 cent followed by 78.70 and 78.50.

Sterling faces 61.8% retracement

Sterling from it part rallied nearly 2 cents, hitting a 6-week high at $1.9134 high, breaching the 50% retracement of the drop from the $1.9549 high thru the $1.8507 low. Next resistance comes up at $1.9152—the 61.8% retracement of the said move. Key pressure stands at $1.92. Support starts at $1.9030, backed by $1.8970.

USDCAD eyes 100-day MA

Canada’s loony joined the fray against the US dollar, despite a softer than expected January CPI at 2.0% y/y, following a 2.1% reading and a 1.6% reading in the core rate after a 1.7% rise in December. USDCAD, shed a full cent from its 1.2350 high, now eyeing the 100-day MA at 1.2225. Subsequent support stands at 1.2159—50% retracement of the move from the 1.1715 low thru the year’s high of 1.2581. Resistance stands at 1.2280s, followed by 1.2360.

At 7:00 AM Canada January CPI y/y (exp 2.2%, prev 2.1%) Canada January CPI ex volatile items y/y (exp 1.8%, prev 1.7%) At 8:30 AM Canada January Leading Indicators (exp 0.2%, prev 0.2%) At 10:00 AM Canada February Consumer Confidence (exp 103.5, prev 103.4)

The dollar sold off sharply against the majors overnight, stumbling to multi-week lows versus the sterling at 1.9134 and euro at 1.3226. Triggering this latest sell-off was a report from the South Korean central bank saying it would diversify its foreign reserves, predominantly held in US Treasuries. South Korea holds Asia’s fourth largest foreign exchange reserves, which climbed to a record $200.2 bln last week. This is the latest in a series of reports that many of the world’s central banks intend to rebalance their portfolio’s away from their current heavy dollar-denominated weightings.

Dollar/yen Breaks 104

The minutes from the Bank of Japan’s Jan 18-19 meeting revealed that there was discussion to allow more flexibility in the Bank’s current account deposits target by either lower the target or allowing for a breach. One board member said it would be appropriate to carefully lower the current accounts deposit target, while another said the Bank might need to allow for target fluctuation without lower target. Nevertheless, some board members agreed that it was appropriate to maintain the target by improving money market operations, and that it was difficult to justify lowering target based on decreasing fund demand alone.

Japan’s government, in its February monthly report, maintained its overall view of the economy saying the economy was recovering moderately with some weakness. However, the government downgraded its view on personal consumption, which marks the largest percentage of the nation’s economic activity at almost 55%. Lastly, the report removed currency rates as a factor to watch for in the economic outlook.

Dollar/yen fell through the 104-level to fall to a 3-week low at 103.84. Support starts at 103.80, followed by 103.50 and 103. Additional floors are seen at 102.75, followed by 102.30 and 102. Meanwhile, resistance is seen at 104, followed by 104.20 and 104.60. Subsequent ceilings are eyed at 105, backed by 105.60 and 106.

Euro Powers Ahead

Eurozone December trade surplus improved to 5.7 bln euros, sharply beating forecasts for a small gain to 3.0 bln euros from November’s upwardly revised 2.7 bln euro surplus. The trade surplus for 2004 climbed to 74.4 bln euros, up from the previous year at 69.7 bln euros. Separately, the ECB released its December net direct portfolio investments inflow, which rose to 44.4 bln euros, reversing the 11.7 bln euro outflow in November.

The euro soared overnight amid wide scale dollar selling, shooting to a one-month high at 1.3226. Resistance is seen at 1.3240, followed by 1.33 and 1.3335. Additional ceilings will emerge at 1.3375, backed by 1.34 and 1.3440. Support starts at 1.32, followed by 1.3180 and 1.3130. Subsequent floors are seen at 1.31, backed by 1.3030 and 1.30.

Cable Edges to One-Month High

Cable climbed up over the 1.91-level overnight to a one-month high at 1.9134. While earlier comments from BoE member Kate Barker pushed the sterling lower, it failed to deter bullish sentiment in the currency. In an interview with an Irish newspaper, MPC member Barker said, “the fundamental point isn’t so much whether there is another quarter point or so to go but that the peak in the cycle may not be very much higher”. Traders will look ahead to the MPC minutes to be released tomorrow for further clues

Cable will face resistance at 1.9130, followed by 1.9160 and 1.92. Subsequent resistance is seen at 1.9240, followed by 1.9265 and 1.93. Support starts at 1.8980, followed by 1.8950 and 1.89. Additional floors will emerge at 1.8870, backed by 1.8840 and 1.88.

After sustaining a down week, the dollar shall turn to a broad array of data from the US, Eurozone and Canada. US markets will close on Monday in observation of President’s Day Holiday. Key US data/events are the minutes of the February FOMC meeting, Jan CPI, Jan durable goods orders and the preliminary Q4 GDP. Traders will await the CPI figures with cautiousness following the higher than expected core PPI seen last week, which might suggest that inflationary pressures are spilling onto the making it to the pipeline. But jut as important are the minutes of the February meeting, which may convey any hits among members on a possible pause in the tightening sometime in the near future, or whether to accelerate the rate hikes. Euro traders will be especially interested in Germany’s February IFO survey on business expectations, while loonie traders await Canada’s CPI figures and UK markets turn to the minutes of this month’s Bank of England meeting.

Markets will also keep an eye on President Bush’s 5-day fence-mending trip to Europe this week, to stabilize any lingering tensions with countries, which did not support the war on Iraq. More importantly is the response from German Chancellor Gerhard Schroeder who has been seeking to revamp the NATO alliance in the hope of avoiding any future unilateral decisions by either members. In addition, President Bush will attempt in dissuading the European Union from ending its arm sales embargo with China. European statesmen will aim at tempering the US’ aspirations for any intervention in Syria and Iran. Any emerging signs of dissent from the trip will likely weigh on the dollar against the euro and the swissy because they reflect renewed obstacles to US foreign policy path.

Speculators Rush into GBP, Sterling, Damage Yen

Speculators last week increased their position in favor of the dollar, opening net longs against the main currencies except for the Aussie and sterling.
Euro speculators remained net sellers against the dollar, but reduced the shorts by 61% to 245 contracts. Yen bearishness deteriorated further when shorts increased 66% to 23,693 contracts to hit the highest level since last March. CHF net shorts fell 34% to 11, 269 contracts, after 4 consecutive weekly increases in shorts. CAD bearishness eased but the currency remained in bearish territory when net shorts eased 28% to 5,307 contracts. Aussie net longs rose 33% to 36,699 contracts after the prior week’s backoff in net longs as improved chances of a rate hike supported the Aussie outlook. Renewed chances of a rate hike were also helpful in the UK when GBP continued to stand out as net longs shot up 120% to 22,239 contracts, the highest level in 3 months.
Yen fights off growth concerns

The Japanese current will attempt waging a come back from last week’s GDO-inflicted tumble, which raised fears of a renewed slump in Japan’s economy. But with Japanese equities remaining relatively well propped by foreign capital, the currency partly could bottom near the 106 yen level. Traders should also pay attention to the cross rate dynamics in the EURJPY rate, and whether it peaks at the 138.28 high—the 61.8% retracement of the 141.56-132.98 drop. Any signs that the cross rate begins to ease off could help USDJPY pull lower.

Hovering at the 105.75 resistance--38% retracement of the 112.51-101.66 drop, USDJPY faces subsequent resistance at 106. Support starts at 104.70, backed by 104.20—the 50% retracement of the 101.66-106.84 move, and subsequent support at 103.61—the 61.8% retracement of the said move.

Euro could ease off temporarily

After launching a 4-day comeback last week, EURUSD could cool off around the $1.31 resistance, which is just above the 38% retracement of the drop from the 1.366-4 high thru the 1.2732 low. Thin Holiday trade will likely dissuade traders from building fresh gains and push EURJPY and EURUSD players to ease off their bids.Key pressure stands at 1.3130. Support starts at 1.29, followed by 1.2870-90s $1.2816. Resilient support stands at 1.2730, followed by $1.2713-- the 50% retracement of the rose from the 1.1759 low to the 1.3664 high.

Aussie contemplates between growth and rates

Aussie stands near the 79-cent figure after a busy week of rate hike speculations that was somewhat tempered by Reserve Bank of Australia Governor Macfarlane who surprised traders by sounding off a relatively donwnbeat growth outlook. Yet, Macfarlane did leave the door open for a rate hike, which traders expect to come as early as next month. The fact that Aussie regained all of its 50-pip drop to its 78.27 low later in early US trade, validates market expectations of a rate hike as early as March.

Hovering around 79 cents, Aussie faces key resistance at 79.30. A breach above the Nov 30 high of 79.44 sees pressure at 79.60. Support starts at 78.30, followed by 77.80 and 77.40.

Sterling’s key consolidation

Sterling’s repetitive consolidation near the $1.8950 resistance draws mixed interpretations, with failure to breach to the upside on one hand and pre-rally consolidation on the other. Yet the fact that sterling broke above the $1.8908 resistance—the 38% retracement of the $1.9549-1.8524 decline, cable’s next test stands at $1.8980, followed by $1.9030—the 50% retracement of the said move.

This week’s Bank of England minutes may not suggest the case for near term rate hike—especially after a relatively dovish Bank of England Inflation report--but traders are all too aware of the Monetary Policy’s frequent change in tone from one meeting to on another. Support starts at 1.89, followed by $1.8825—the 38% retracement of the 1.8951-1.8753 drop, and $1.8740.

USDCAD eyes 50% retracement

Monday’s release of Canada’s retail sales, Tuesday’s CPI figures and remarks from BoC’s Goodale will be the week’s focus for the loonie. USDCAD’s decline past the 1.2280s, faces support at 1.2257-50% retracement of the rise from the 1.1944 low to the 1.2581 high. Subsequent support follows at 1.2233—the 100-day moving average. A breach below the 1.2215 opens the way for 1.2180. Interim resistance stands at 1.2331, followed by 1.2380.

The dollar’s PPI-drive gains were dissipated later in the US session as traders stuck to their dollar shorts ahead of the 3-day weekend in the US. The dollar, remained resilient against the falling yen in the midst of Wednesday’s GDP figures from Japan showing a technical recession, but the greenback failed to hold on to its gains vs the Aussie after a surprisingly dovish speech by Reserve Bank of Australia Governor Macfarlane.
US PPI rose 0.3% in January after a 0.3% drop in December, while the closely watched core PPI jumped 0.8%--its highest rate since December 1998. The rise in core prices was led by a 3.4% jump in cigarette prices and a 2.8% rise in prices of alcoholic beverages, each the highest in since April 2002 and May 2000 respectively.
The report caused a 10 bps jump in the 10-year yield Treasury to 5.26% on fears of rising inflation, shaking off traders who have begun pondering the reason behind continuously low bond yields despite the Fed’s 250-bps rate hikes. Many also argued that Greenspan testimony this week hinting at further rate hikes was behind the run-up in yields.
On the consumer side, the University of Michigan’s consumer sentiment survey fell to 95.4 in preliminary reading from 95.5.

USDJPY pushed towards the 105.75--38% retracement of the 112.51-101.66 drop, followed by 106. Support starts at 104.70, backed by 104.20—the 50% retracement of the 101.66-106.84 move, and subsequent support at 103.61—the 61.8% retracement of the said move.

Aussie regained all of its 50-pip drop to its 78.27 low after Reserve Bank of Australia Governor Macfarlane surprised traders by sounding off a relatively donwnbeat growth outlook But Macfarlane did leave the door open for a rate hike, which traders expect to come as early as next month.

Aussie bounced back to the 79 level, facing resistance at 79.30. A breach above the Nov 30 high of 79.44 sees pressure at 79.60. Support starts at 78.30, followed by 77.80 and 77.40.