By DailyFX - US Dollar. After yesterday's strong move in the currency market, the dollar extended its weakness against the majors today.

With no...

... significant economic releases on the
calendar, talk of reserve diversification has once again resurfaced. We have
repeatedly said that this topic will be a sore point that hangs over the dollar and
something that the market will revisit in the months if not years to come. Earlier
this morning, a member of the Chinese Parliament speaking at a conference in Dubai
said that the central bank of China should gradually reduce its US Treasury
holdings. Although the Chinese government quickly came out to do damage control by
playing down the comments as simply the view of that official only, later comments
by the central bank of Qatar indicating that they may be buying more Euros puts to
question whether the other major central banks really do not have the same thought
in mind. Despite last week's hawkish FOMC statement, the market is still doubting
the Fed's optimism. However as much as we have been warning about the risks for the
dollar, the recent move has been very strong and the EUR/USD is now reaching some
critical levels on the topside which means we could see some stalling before a
continued move higher. The non-manufacturing ISM index is due for release tomorrow.
Even though the forecast is for a dip, the service sector has been performing far
better than the manufacturing sector on average over the past two years which means
that even though yesterday's ISM number came in bad, tomorrow's report could avoid
following the same fate. Finally, a popular newsletter report predicted the Federal
Reserve to stop raising interest rates after the May rate hike. Although two more
rate hikes seem to be the consensus, the report is still worth noting since it is
closely followed on the institutional level.

Euro

The Euro jumped 1.1 percent against the US dollar today to the highest level in 2
months. In fact, it is now less than 100 pips away from its year to date high.
Unemployment and producer price numbers were both in line with expectations which
mean that it had little impact on the EUR/USD. The data does however show that the
unemployment outlook is improving with the unemployment rate dipping from 8.3
percent to 8.2 percent. Tomorrow should be different however since are expecting
retail sales and service sector PMI for the entire region. These reports should
cement expectations for how hawkish the central bank could be on Thursday. Growth
in retail sales are expected to be flat, which could come as a disappointment to
some. For the most part, the market is expecting hawkish comments on Thursday given
the recent comments by central bank officials. Therefore, if Trichet fails to
deliver, we could see a sharp pullback in the Euro. Meanwhile over in Switzerland,
consumer prices fell 0.1 percent last month. This comes as a surprise since the
market was expecting prices to tick higher by 0.2 percent, which would solidifying
expectations that the Swiss National Bank will continue to raise interest rates a
few more times this year.

British Pound

The British pound joined in the rally today, rising 0.9 percent against the US
dollar. The construction sector PMI report came in stronger than expected,
confirming continued stabilization in the housing market. The index rose from 51.9
to 54.7 which is the highest level since September of last year and adds to fuel to
those who believe that the central bank will continue to leave interest rates
unchanged for the remainder of the year. Mergers and acquisitions also bolstered
the British pound. Last month, there were a great deal of sterling positive
announcements and today we have talk of Prudential PLC possibly being sought for
acquisition by a US company. Tomorrow we should move away from focusing mostly on
dollar driven reports and rumors to movements based upon more concrete economic
data. Industrial production, service sector PMI and the BRC shop price index are
all due for release. Taking a look at the forecasts, it seems that the market is
expecting a batch of weaker numbers. If so, we could see a nice retracement in the
GBP/USD.

Japanese Yen

For the most part, USD/JPY has been trapped in a very tight trading range, making
some sort of major breakout seem imminent. The Japanese Yen strengthened against
the US dollar but weakened against all of the other major currencies. The Yen
benefited a bit from rumors of reserve diversification, but for the most part
consolidation remains the predominant theme. There is talk that a strong stock
market as well as the prospect for higher yields could make Japanese investments
more attractive. The economic calendar is fairly light for Japan this week which
means that any breakout that we see in USD/JPY will most likely be driven by dollar
factors rather than yen factors.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com
By DailyFX

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