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Forex outlook:
The euro dropped against the yen on Wednesday after the European Central Bank gave no clear indications about the outlook for interest rates beyond 2007 while global equity market weakness broadly lifted the Japanese currency.
The yen was on track for the largest daily increase against the euro and U.S. dollar in about two months, with investors exiting risky trades funded by borrowing cheap in yen after seeing stock markets around the world weaken. The ECB lifted its benchmark lending rate to 4 percent, but the quarter percentage point hike had been well telegraphed and failed to boost the euro, which has been rising along with European interest rates over the last year. While ECB President Jean-Claude Trichet said liquidity remains ample and inflation risks remain tilted to the upside, he added the ECB does not intend to alter its 2008 inflation forecast. “Some investors were expecting too much out of the ECB's announcement. They wanted an aggressive indication about further rate hikes, but in the end, the ECB did not offer that," said David Durrant, chief strategist at Julius Baer Investment Management in New York. The euro fell around 0.5 percent from late Tuesday to 163.37 yen. It had risen to a record high on Tuesday of 164.62, according to electronic platform EBS.
Equity weakness prompted investors to unwind trades financed by borrowing yen at low Japanese interest rates, a strategy known as the carry trade, analysts said. The Morgan Stanley Capital International gauge of world stock markets fell 1 percent, the largest single-day decline in a month. But Tim Mazanec, senior currency strategist at Investors Bank & Trust in Boston, said market players probably shouldn't expect liquidity to dry up and global interest rates to start falling just yet. Investors in interest rate futures have nearly priced out any chance of the Federal Reserve cutting rates this year after data has pointed to surprising strength in the U.S. economy.
Gold: U.S. gold futures finished 50 cents lower in choppy trading on Wednesday, but off the session low because of a stronger dollar, and dealers said the precious metal could fall further because of chart-based weakness and a lack of buying interest. A floor trader said options trading have been bearish of late, a sign that underlying futures could test lower prices in the short run. Most-active August gold on the COMEX division of the New York Mercantile Exchange settled down 50 cents at $674.60 an ounce. The contract peaked at $677.30, which was near its three-week high of $680.60, and bottomed at $670.20. Jonathan Jossen, an independent trader, said from the COMEX floor that early trading was "directionless" and turnover was low as investors lacked buying interest.
Crude Oil: U.S. crude oil futures rose on Wednesday, boosted by reports that Turkey had sent troops into Iraq and a cyclone buffeting Oman, even as RBOB gasoline futures fell after the government said gasoline stocks rose more than expected last week. "Crude was up on the Turkey issue and the lingering effects of the cyclone," said John Kilduff, senior vice president, Man Financial. On the New York Mercantile Exchange, July crude rose 35 cents, or 0.53 percent, to settle at $65.96 per barrel, trading from $65.21 to $66.31. Wednesday's peak was just under Monday's $66.48 high, which was the highest level for front-month crude since $66.65 was struck on April 30. Crude stocks rose 100,000 barrels to 342.3 million barrels, against a forecast of a 300,000-barrel rise. EIA analyst Doug MacIntyre said strong imports of finished gasoline and gasoline blendstocks, as well as growing production of domestic ethanol, could keep a cap on the bullish effect on oil prices of low refinery use.
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