Dollar dented by drop in investment flows; yen continues lower Monday, September 18, 2006
LONDON - The dollar drifted lower after a day of conflicting signals, with the slump in portfolio flows into the US denting sentiment eventually outweighing other factors.
The trading day started off quite well for the dollar, with the G7's omission of any mention of recent yen weakness only serving to worsen the currency's downtrend. The dollar, along with most other majors managed to gain on the Japanese unit.
That aside, the dollar got a fleeting boost earlier when US Treasury Secretary Henry Paulson said that the US will not budge from its strong dollar policy.
He was speaking after annual talks of the G7 and the IMF.
Things changed, however, when the US Treasury revealed that portfolio capital flows to the US slowed sharply, to their lowest level in over a year, during July. Inflows during the month totaled just 32.9 bln usd in July, down from 75.1 bln in June and their lowest level since May 2005.
Significantly, the inflow was not enough to cover the trade deficit of 68 bln usd over the same month.
"The final total looks grim at 32.9 bln usd -- an outcome that could hit the dollar and halt its recent appreciation," said Mitul Kotecha at CALYON.
"The fact that the data is backward looking, but more importantly, the lack of attention to structural imbalances at present suggests that the dollar may escape from significant damage, however," he added.
Kotecha was proven correct as the dollar's falls were limited after sharp initial knee-jerk selling.
Earlier, the dollar ignored a wider US current account gap. The Commerce Department said the US current account deficit widened to 218.4 bln usd in the second quarter to reach 6.6 pct of GDP. The shortfall was wider than expected and the second highest ever. And, to make matters worse, the deficit in the first quarter was revised to 213.2 bln usd from the initial estimate of 208.7 bln usd.
"The US current account deficit came in about 4 bln usd wider than expected, but with numbers this large, 4 bln seems like a rounding adjustment. Dealers are mostly sitting back," said Jamie Coleman at Thomson IFR markets.
The yen, meanwhile, continued lower after the weekend's G7 meeting failed to make mention of the yen's weakness.
The final communique from the G7 meeting called for greater currency market flexibility from emerging economies and especially China. The yen appeared to have escaped notice even though behind-the-scenes wrangling is almost certain to have occurred.
There were pointed comments from Japanese Finance Minister Sadakazu Tanigaki and European Central Bank Governor Jean-Claude Trichet. The former said there was no specific discussion on the yen or euro during the meeting.
But Trichet hinted that more did go on: "We noted that the exit from the zero interest rate policy (in Japan) and that its recovery is now broadly based -- we agree that the yen will reflect these developments."
Analysts at BNP Paribas believe the yen has scope to weaken further. Against the euro, any break above the 149.85 yen initial resistance level will trigger renewed pressure towards 150.75, they said.
However, they recommended caution as the yen's weakness against the euro "remains vulnerable to a corrective pullback".
Elsewhere, the pound stayed little changed after news that a growing majority of Britons are predicting a rate hike over the next 12 months, signifying a rise in inflation expectations.
According to the Bank of England's latest quarterly survey of inflation expectations, the proportion of Britons predicting higher interest rates over the next 12 months has hit a 2-year high as inflation expectations stay at elevated levels.
The survey, conducted in August by pollsters NOP, found that 65 pct of respondents expect a rate hike over the next 12 months, up from just 48 pct in the previous survey in May.
The trading day started off quite well for the dollar, with the G7's omission of any mention of recent yen weakness only serving to worsen the currency's downtrend. The dollar, along with most other majors managed to gain on the Japanese unit.
That aside, the dollar got a fleeting boost earlier when US Treasury Secretary Henry Paulson said that the US will not budge from its strong dollar policy.
He was speaking after annual talks of the G7 and the IMF.
Things changed, however, when the US Treasury revealed that portfolio capital flows to the US slowed sharply, to their lowest level in over a year, during July. Inflows during the month totaled just 32.9 bln usd in July, down from 75.1 bln in June and their lowest level since May 2005.
Significantly, the inflow was not enough to cover the trade deficit of 68 bln usd over the same month.
"The final total looks grim at 32.9 bln usd -- an outcome that could hit the dollar and halt its recent appreciation," said Mitul Kotecha at CALYON.
"The fact that the data is backward looking, but more importantly, the lack of attention to structural imbalances at present suggests that the dollar may escape from significant damage, however," he added.
Kotecha was proven correct as the dollar's falls were limited after sharp initial knee-jerk selling.
Earlier, the dollar ignored a wider US current account gap. The Commerce Department said the US current account deficit widened to 218.4 bln usd in the second quarter to reach 6.6 pct of GDP. The shortfall was wider than expected and the second highest ever. And, to make matters worse, the deficit in the first quarter was revised to 213.2 bln usd from the initial estimate of 208.7 bln usd.
"The US current account deficit came in about 4 bln usd wider than expected, but with numbers this large, 4 bln seems like a rounding adjustment. Dealers are mostly sitting back," said Jamie Coleman at Thomson IFR markets.
The yen, meanwhile, continued lower after the weekend's G7 meeting failed to make mention of the yen's weakness.
The final communique from the G7 meeting called for greater currency market flexibility from emerging economies and especially China. The yen appeared to have escaped notice even though behind-the-scenes wrangling is almost certain to have occurred.
There were pointed comments from Japanese Finance Minister Sadakazu Tanigaki and European Central Bank Governor Jean-Claude Trichet. The former said there was no specific discussion on the yen or euro during the meeting.
But Trichet hinted that more did go on: "We noted that the exit from the zero interest rate policy (in Japan) and that its recovery is now broadly based -- we agree that the yen will reflect these developments."
Analysts at BNP Paribas believe the yen has scope to weaken further. Against the euro, any break above the 149.85 yen initial resistance level will trigger renewed pressure towards 150.75, they said.
However, they recommended caution as the yen's weakness against the euro "remains vulnerable to a corrective pullback".
Elsewhere, the pound stayed little changed after news that a growing majority of Britons are predicting a rate hike over the next 12 months, signifying a rise in inflation expectations.
According to the Bank of England's latest quarterly survey of inflation expectations, the proportion of Britons predicting higher interest rates over the next 12 months has hit a 2-year high as inflation expectations stay at elevated levels.
The survey, conducted in August by pollsters NOP, found that 65 pct of respondents expect a rate hike over the next 12 months, up from just 48 pct in the previous survey in May.
Labels: Japnese Yen, US Dollar
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