Expert Analysis of Today's Market

• The dollar traded little changed versus key currencies after US existing-home sales came in line with expectations on Monday. The dominant feature of today’s trade was overnight profit-taking in carry-trades. After hitting new multi-year lows against several major currencies last week, the yen rose moderately following warnings from the Bank for International Settlements of one-way bets against the yen and falling stocks in Asia and Europe. Risk aversion reduced carry-trades and strengthened the yen as Chinese stocks fell nearly 4% today following a 3.5% drop on Friday. However, the yen pared gains on strong US equity prices. Sterling touched the 2.00 resistance against the dollar as investors priced in an interest-rate increase by the Bank of England in early July.


• The EUR/USD is testing the 1.35-area resistance from the downward trend. We expect this resistance to hold and the downward trend to resume. If the 1.3550 resistance is broken, the pair will test highs at the 1.37 handle.

• Having been in downward sloping trend for over a year, the US dollar index is now at a crucial technical level. The penetration of this resistance would be a major development. If the resistance is broken, the greenback will rally and a dollar bull market will begin. The short-term downside risk is that the index may fall to 81.50 before a serious test of the downtrend.

Financial and Economic News and Comments

US & Canada

• The Dallas Fed manufacturing production index declined to 14.0 in June from 25.0 in May, the Federal Reserve Bank of Dallas said. The bank’s general activity index fell to 10.8 from 20.9. Readings above zero indicate positive activity.


• US existing-home sales in May fell to 5.99, a 0.3% m/m decrease from April’s revised 6.01 million annual pace, the lowest level since June 2003, the National Association of Realtors said. The annual sales pace fell 10.3% y/y. Inventories climbed and prices fell for the 10th consecutive time in May. The median home price was $223,700 in May, down 2.1% y/y, and the average price fell 0.8%. Inventories of homes rose 5.0% at the end of May to 4.43 million available for sale, which represented an 8.9-month supply at the current sales pace.

Europe

• German consumer confidence rose to a 6-month high. GfK AG’s confidence index for July rose to 8.4 from 7.4 in June, the GfK reported.


• Global economic growth is expected to continue in 2007 and 2008 at a slightly slower pace than in 2006, while inflation dangers are seen easing, the Bank of International Settlements said in its annual report. “The consensus view for 2007 is for a broad-based economic expansion, easing inflation pressures and gradually receding current account imbalances,” the BIS said in the report. Long-term interest rates should stay around current levels, the BIS predicted.


• European Union leaders broke through years of deadlock on a failed constitution and agreed to a reform treaty which will introduce a full-time European Union president, a foreign affairs chief and a new voting system.


• Hungary’s central bank unexpectedly cut its benchmark interest rate, the European Union’s highest, for the first time since 2005 after inflation slowed.

Asia-Pacific

• People’s Bank of China Governor Zhou Xiaochuan said China’s shares may be overvalued and hinted at further interest-rate increases.


• The BIS said in its annual report that the yen’s recent slide was “anomalous.”


• China will keep the bulk of its US dollar holdings because the currency is one of safest investment options, a People’s Bank of China assistant governor Yi Gang said. “As far as we’re concerned, the serious reduction of the dollar reserve is a small probability,” he said, adding that any adjustments to its dollar holdings will be incremental.

FX Strategy Update