SYDNEY (XFN) - The US dollar was trading firmer against the euro and yen in Asian morning trade Monday, but its overall weakness is likely to remain as the Federal Reserve signalled it could pause in its
interest rate-increase cycle, dealers said.

They said the dollar was sold in overnight trading on Friday, building on the greenback’s weakness after Thursday’s testimony by Federal Reserve Chairman Ben Bernanke to the US Congress.

Dealers said Bernanke’s suggestion of an imminent pause in interest rates hikes led to the implied probability a rate hike to 5.25% on June 29 falling to 26% from 64% last Wednesday.

At 10:13 am in Sydney (0013 GMT) the euro was softer at $1.2617 from $1.2633 in late New York trading on Friday while the dollar was firmer at Y113.71 from Y113.77.

Dealers said the euro rose to a 12-month high of $1.2633 in overnight trading on Friday from $1.2529 while the dollar fell to a 15 week low of Y113.66 yen from Y114.27.

National Australia Bank currency strategists said in a market note that the euro is drawing closer to major Fibonacci resistance at $1.2650, and speculators now hold the largest net long euro position on record.

But they said “another benign US consumer inflation report due tonight and anticipation of a hawkish European Central Bank press conference on Thursday will no doubt keep the euro on the front foot.”

Official data on Friday showed that the advanced measure of US gross domestic product for the March quarter rose to 4.8% annually from the hurricane affected 1.7% growth over the year to the December quarter.

The rise was driven by a 5.5% annual increase in personal consumption spending, a 16.4% increase in equipment investment over the March quarter, while net exports subtracted from GDP growth.

NAB currency strategists said the Federal Reserve stated it will look through the expected rebound in GDP in the March quarter, just as it looked through the hurricane-related weakness in the previous quarter.

They said the Federal Reserve sees growth returning to trend of 3.50% for the remainder of 2006, giving added focus to Wednesday’s ISM non-manufacturing survey and Friday’s payroll data for growth in the June quarter.

The core PCE deflator, the Federal Reserve’s preferred inflation measure, eased to 2.0% in the March quarter from 2.4% in the December quarter.

Commonwealth Bank senior economist Michael Workman said in a market note that Friday’s data did not change his firms view the Federal Reserve will pause hiking rates after the expected increase in the Federal funds rate to 5.0%.

He said the core PCE deflator remains elevated and near the top of the Federal Reserve’s comfort zone, but it is not showing signs of accelerating at this stage.

“Whether the strong economic growth of the March quarter continues through the June quarter will be key in determining the risks to interest rates going forward,” CBA’s Workman said.

The employment cost index for the March quarter fell to 0.6% from the 0.8% increase in the December quarter and was below market expectations of a 0.9% rise.

The Chicago PMI survey for April fell to 57.2 index points from 60.4 in March and was below the market consensus of a fall to 58.0 index points.

Dealers said tonight’s focus in the US will be the personal spending data for March and the ISM manufacturing survey for April which is a good indicator of industrial production and capacity utilization
trends over the June quarter.

Meanwhile, dealers said the Australian dollar fell short of trading through $0.7600 on Friday, under-performing in a weakening US dollar environment.

They said only a Reserve Bank of Australia (RBA) interest rate hike on Wednesday would provide the catalyst for the Australian dollar to start outperforming again.

Dealers said markets are pricing in a 55% chance of a RBA 25 basis point hike to 5.75%, but a recent market survey showed 17 out of 21 economists did not expect the central bank to act on its mild tightening
bias.

NAB currency strategists said the RBA is expected to hike rates on Wednesday, which could push the Australian dollar through the key $0.7620 Fibonacci level.

“Admittedly, we would be quite cautious above $0.7600 since the Australian dollar has not spent much time there, while the Australian-US two-year bond yield spread has been below 100 basis points,” they said.

We have closed USDJPY position at 117.62 with profit 98 pips.

Sell it at 118.60 stop 119.05. Target open

The US dollar was trading lower against major currencies and is expected to remain under pressure as traders
seek safe haven currencies on concerns over Iran and ahead of key data releases, dealers said.

The US dollar was sold overnight after Iran said that it had successfully enriched uranium, and a second successive fall in US bond yields also weighed on the greenback.

Dealers said focus will gradually shift toward tonight’s release of the US trade deficit for February, where a smaller deficit is expected but may nonetheless shift attention back to the nation’s deficit problems.

At 10.35 a.m. in Sydney (0035 GMT), the euro was firmer at $1.2165 from 1.2152 in late trade in New York while the dollar was lower at Y118.00 against the yen from Y118.19.

The euro suffered temporary selling overnight following a weaker than expected economic sentiment survey in Germany, dealers said.

The ZEW survey for April fell to 62.7 index points from 63.4 in March and was lower than the market expectation of a rise to 65.5.

“Despite the fall in the ZEW survey, it remains near historical highs, and the current sentiment index is at its highest level in nearly five years,” Commonwealth Bank NZ economist Chris Tennent-Brown said.

“We remain upbeat about the outlook for the German economy this year,” he said.

National Australia Bank currency strategists noted European Central Bank member Klaus Liebscher commented the bank could raise rates in June but will depend on increased investment and consumption.

“While further gains in the euro are likely in store on any upside surprise to the consensus expectation for a $67.5 bln US trade deficit, we still believe $1.2330 will provide a cap,” they said.

In the US, Dallas Federal Reserve president Richard Fisher said there is little evidence that US firms are passing on the rising cost of metals, oil and other commodities.

Fisher added the Federal Reserve will do what it takes to balance the goals of low, stable inflation and firm economic growth which will be dependent on the flow of economic data.

Minneapolis Federal Reserve president Gary Stern noted that US jobs growth is not boosting inflation, while economic forecasts will be key due to the lag between interest rate changes and the economic impact.

Meanwhile, dealers said the yen has regained some ground following a minor sell-off after yesterday’s finish following the Bank of Japan’s policy meeting.

As expected, the BOJ left rates at zero and governor Toshihiko Fukui said there’s no set timetable for raising interest rates.

CBA’s Tennent-Brown said the BOJ will likely take the next few months to drain excess liquidity out of the economy before a possible hike in the December quarter.

San Francisco, April 11. Following today”s failure to test 119.00, with a high of 118.89, traders expectations of testing that level are lowered, with some traders now forecasting a pullback to 117.50 now that the top of the 115-119 range has been rejected for the fourth time. USD/JPY is now at 118.25/28 with some offers emerging as low as 118.40/50. The bulk of selling interest however remains around 118.75-119.00 with fresh selling interest noted after the pullback from the morning highs.

Buyers are said to be large however in the 117.00-117.50 area that should stall any move lower. Some traders see higher levels of 118.00 able to hold the downside tonight however in Japan.

For EUR/JPY, traders still see good support on dips to 143.30. However, with Asian selling at 144.00 and with a number of JPY crosses like AUD/JPY and NZD/JPY capped this afternoon, some see the cross still rending lower particularly with the CHF/JPY now in a broad downtrend pattern off December highs above 93.00. But, opinion is mixed on EUR/JPY with one trader seeing risk for a move back to 145.00, particularly with the bounce in EUR/USD this afternoon. EUR/JPY is at 143.61 currently.

BEIJING (MNI) - China’s foreign exchange reserves are exposed to heavy risks of US dollar rate fluctuations but at present, there are no other alternatives that can replace the greenback, a well-known Chinese researcher said in a newspaper article.

As such, Xia Bin, a finance researcher with the State Council’s Development Research Center and a former central bank official, suggests China needs to look at other non-currency channels to invest its reserves.

Xia wrote in an article published in the China Business News, that China’s heavy US dollar-laden reserves actually translates to cheap lending for the US and makes China vulnerable to sharp changes in dollar exchange rates.

“Judged from history, the US dollar hegemony often lets the dollar appreciate or depreciate to solve its domestic problems at the cost of other countries and China’s excessive holding of US dollar assets can book heavy losses in a period of dollar depreciation,” said Xia.

But he acknowledged that China currently has no alternative currency to replace the dollar given that the greenback will continue to be the world’s top hard currency for coming two or three decades or “even longer.”

By Vicki Schmelzer
NEW YORK, April 10 (MNI) - The dollar firmed against the euro and yen in morning action Monday, although momentum is unlikely to mount until after Bank of Japan decision Tuesday.

The euro was trading at $1.2090 and dollar-yen at Y118.67, near the dollar’s highs of the day at $1.2086 and Y118.67, and compared to Friday’s closing levels at $1.2102 and Y118.28.

In dollar-yen, a break of resistance at Y118.80 and then Y119.00 would be needed for a retest of this year’s high near Y119.40, seen in February.

Pivot support for the euro was seen at $1.2070-80, with a break below that level suggesting scope for a return to a “1.19 handle” and potentially to this year’s low near $1.1800, seen Jan. 2.

Conversely, if $1.2070-80 holds fast, then euro-dollar may be on track for a retest of the 2006 high near $1.2333, seen last Thursday, ahead of the European Central Bank decision and accompanying statement.

ECB President Jean-Claude Trichet rapped euro bulls’ knuckles last week by warning market players not to get ahead of themselves in terms of anticipating future ECB hikes.

“I would say that the present high probability, which is given for an increase of rates in our next meeting, does not correspond to the present sentiment of the Governing Council,” Trichet said.

This prompted widespread euro selling against the dollar and yen Thursday and Friday.

Market players are waiting now for the BOJ’s decision following a two-day monetary policy meeting.

No major policy change is expected at the policy board meetings scheduled in April, May or June while the BOJ continues trimming the current account balance, used as a tool to flood the money market with excess cash, to a minimum level just above Y6 trillion from Y30-35 trillion a month ago.

Financial markets have already factored in an end to the bank’s zero rate policy at the policy-setting meeting on either July 14 or Aug.

11, even before the central bank digests second-quarter GDP data due out that same day, or a major benchmark revision to CPI data to be announced Aug. 25.

Japanese central bankers Tuesday are expected to update the BOJ’s estimate for economic growth potential and what they consider a “neutral” interest rate, just before the nine-member policy board presents the semi-annual Outlook report April 28.

Global economists at Goldman Sachs said the BOJ announcement “should provide further guidance to a market that is now expecting a relatively early end to ZIRP (zero interest rate policy).”

“We changed our own Japanese rate view last Friday and now expect an earlier start to hikes and a somewhat faster schedule for tightening,” they said in a report.

Goldman Sachs now looks for the BOJ to begin raising rates in August and sees two rate hikes in the second half of 2006, to be followed by two more in the first half of 2007.

In the U.S., the first major data release of the week will be Wednesday’s February international trade report. The median estimate in a international survey of economists is for the deficit to narrow to $67 billion in February compared to the record $68.5 billion in January.

An improvement in the trade deficit may not be enough of a driver to take the dollar dramatically higher, analysts said.

Market players are currently keeping an eye on everything from global economic data to other happenings — gold is expected to test $600, oil hovering near important resistance at $68.40 — trying to figure out what will be the catalyst for the next dollar move.

“They want to know the driver and also what’s going to be the direction,” said Lara Rhame, currency strategist at Credit Suisse.

With the euro hovering back in the middle of the year’s $1.1800 to $1.2330 range, both euro bulls and bears can make a case for their currency forecast.

“You can spin a story on both sides, and yet none of them feel comfortable with their view,” Rhame said.
Of this week’s U.S. data, Credit Suisse sees the February trade deficit narrowing to $66 billion.

Rhame warned, however, that while the dollar has a tendency to weaken when the deficit becomes wider, the greenback usually “gets no benefit” when the trade deficit narrows.