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Euro rises to new high against yen

Jul 21, 2008 Market Outlook

Euro rises to new record against yen

Sterling trades weaker on gloomy U.K. economic prospects

By William L. Watts & Lisa Twaronite, MarketWatch

Last Update: 7/21/2008 12:13:00 PM

SAN FRANCISCO (MarketWatch) — The euro and yen stole the spotlight from the U.S.
dollar Monday, with the European unit rising to a record against Japan’s
currency.

The euro was buying 169.46 yen, up less than 0.1%. It earlier rose as high as
169.89, its highest level since the euro began trading in January 1999.

Monday was a Japanese national holiday and markets there were closed, and thin
liquidity might have contributed to the yen’s losses. But analysts said the
European unit also benefited from dollar weakness amid ongoing concerns about the
U.S. economy.

“The primary reason why euro/yen has rallied 11% over the past 3.5 months is
because of U.S. growth — not many people realize that the price action of
euro/yen is directly correlated with how the U.S. economy is doing,” said Kathy
Lien, chief strategist at DailyFX.com.

Lien cited a direct correlation between the Institute for Supply Management’s
July national factory survey and the euro/yen rate.

“Each time the U.S. manufacturing sector contracted, euro/yen rallied,” she said.

Monday’s U.S. data hinted at further weakness ahead. The Conference Board’s index
of leading economic indicators, which attempts to forecast turning points in the
economy, declined 0.1% in June. The result for May was revised to a decline of
0.2%, compared with a prior estimate of a 0.1% gain. See Economic Report.
Click for Detail

But the greenback was supported by Bank of America’s (BAC) better-than-expected
results. Bank of America reported a 41% profit fall for the second quarter but
still beat Wall Street earnings estimates, boosting its shares in early action.
See full story.
Click for Detail

The euro also gained on the dollar, rising 0.1% to $1.5870. The dollar slipped
0.2% against the Swiss franc to 1.0205 francs, and was down 0.1% against the yen,
at 106.79 yen.

But the buck gained on the British pound, which was down 0.1% at $1.9971.

The dollar index (DXY), a measure of the greenback against a trade-weighted
basket of six major currencies, slipped 0.2% to 72.047.

The dollar gained ground last week, shrugging off the euro’s earlier push to a
new all-time high near $1.6036. Better-than-expected results from several major
U.S. banks contributed to the rebound, along with a sharp retreat in oil prices.

Analysts said uncertainty about regional bank earnings this week, however, could
continue to limit the dollar’s upside potential.

“The larger U.S. banks may have impressed last week with lower-than-expected
write-downs … but there are still nerves surrounding the outlook for the
economy across the Atlantic with many fearing the worst with the regional banks
set to report in the coming days,” said Gary Thomson, head of sales trading at
CMC Markets.

Strategists at Commerzbank said this week’s economic data could also cap any
upside for the dollar.

“The market is worried about possible stagflation in the U.S. and maintains its
rather dollar-negative mood, especially since this week’s U.S. fundamentals
[initial claims, housing data, durable-goods orders] are likely to underline this
view,” they wrote. “Earning reports from regional banks could intensify concerns
about the U.S. financial sector.”

That said, data on economic sentiment in the 15-nation euro zone later this week
are unlikely to offer a rosy picture, either.

Purchasing-managers index data for the euro zone and the closely watched Ifo
Institute business-climate index are both scheduled for release on Thursday.
Further deterioration in sentiment could intensify economic worries and weigh
down the single currency, Commerzbank wrote.

In the short term, oil may prove to be the main risk factor for further dollar
gains, they said.

Meanwhile, a decline in U.K. house prices and a warning from a prominent
economic-forecasting group that Britain will struggle to avoid recession in the
coming year left the pound under pressure, analysts said.

The latest Rightmove survey found house prices declined 1.8% in July and were
down 2% compared to the same month a year ago. See full story.
Click for Detail

Separately, the Ernst & Young Item Club forecast that the U.K. would register
just 1% growth in gross domestic product next year as house prices continue to
tumble and consumption declines.

David Blanchflower, a member of the Bank of England’s policy-setting committee,
warned that the U.K. economy may already be in recession and repeated his call
for aggressive interest-rate cuts in an interview published in the Guardian
newspaper.

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Tags: 5 Months, Bank Of America, Chief Strategist, Currency Euro, Direct Correlation, Dollar Weakness, Economic Prospects, Economic Report, Greenback, Index Of Leading Economic Indicators, Institute For Supply Management, Japan Currency, Japanese National Holiday, Leading Economic Indicators, Liquidity, Manufacturing Sector, Marketwatch, Swiss Franc, Yen Euro, Yen Rate