Expert Analysis of Today's Market

• The dollar strengthened modestly versus most key currencies in light pre-holiday Tuesday trading after two sessions of steep falls, hovering just above a record low against the euro. Investors await interest-rate decision meetings by the Bank of England and the European Central Bank. The BOE or ECB rate-hike decision could keep overseas yields climbing while US housing troubles are pressuring US Treasury yields. The dollar hit another 26-year low against sterling, which has been steadily climbing ahead of an expected BOE rate increase on Thursday. The EUR/JPY was little changed after reaching an all-time high today.


• The EUR/USD fell slightly on profit taking and a less-than-expected decline in US factory orders. After breaking its downtrend last week, the pair rallied and may test its all-time high this week. We believe the test of this resistance could be a good selling opportunity as higher growth and yields are already priced in.

• The dollar index closed at 81.38 yesterday. If this important support is broken, the index will fall. However, we expect a new assault on the downtrend line in the near future. If this resistance is broken, the greenback will rally and a dollar bull market will begin.

Financial and Economic News and Comments

US & Canada

• US factory orders fell a less-than-expected 0.5% m/m in May, the first decline in four months, following a revised 0.5% gain in April, the Commerce Department said. Non-defense capital goods orders excluding aircraft declined 2.1% m/m in May indicating some weakness in business investment.


• The index for pending sales of existing homes fell at a seasonally adjusted annual rate of 3.5% to 97.7 in May from April’s 101.2, the National Association of Realtors said. The index was 13.3% lower than the level of 112.7 in May 2006. The May data indicates the housing market weakness will continue.

Europe

• The eurozone labor market continued to tighten in May, as the unemployment rate declined to 7.0% from 7.1% in April, Eurostat reported.

Asia-Pacific

• BOJ Deputy Governor Toshiro Muto said the Bank of Japan has no preset schedule on interest-rate adjustments, adding that moves would depend on improvements in the Japanese economy and prices.


• The People’s Bank of China said it will “moderately” tighten monetary policy to control investment and lending growth and prevent the economy overheating this year.


• Keeping Japan’s interest rates unchanged for too long could hurt economic growth, two BOJ board members said. Failing to raise rates soon “could cause large swings in economic activity and inflation,” Deputy Governor Toshiro Muto said. Fellow board member Kiyohiko Nishimura said “to stand pat for a long period of time is not a prudent strategy.”


• Australia’s retail sales unexpectedly fell 0.1% m/m, for a second month, in May, the Bureau of Statistics said. Meanwhile, the number of approvals to build or renovate homes fell a stronger-than-expected 5.6%.

FX Strategy Update