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Forex outlook:
The dollar rose to a fresh 4-1/2-year high against the yen on Thursday for a second straight day ahead of a Bank of Japan policy meeting and a report on U.S. consumer inflation that could determine whether U.S. Treasury yields extend a six-week climb. Since April, the benchmark 10-year U.S. Treasury note yield has risen nearly 60 basis points as dealers priced out any chance of a Federal Reserve interest rate cut in 2007, helping the dollar advance from record lows against the euro. Globally bond yields have been rising on expectations of sustained economic growth and central banks around the world will continue to raise interest rates to contain inflation. But the pace at which Treasury yields have been rising has surpassed other major economies, offering investors a bigger incentive to put their money into dollar-denominated assets.
A report released on Thursday showed that on a year-on-year basis, the U.S. core producer price index was up 1.6 percent in May compared with 1.5 percent in April, leaving open the possibility that Friday's consumer inflation data could reflect upward pressures. Core prices exclude food and energy costs. "This morning's wholesale inflation data was marginally dollar positive as it highlighted lingering potential inflation risk and compounded the view the Federal Reserve will not cut interest rates this year," said Alex Beuzelin, senior market analyst at Ruesch International in Washington. "Critical support for euro/dollar comes in the $1.3250-70 area and we will find out if there is indeed a floor there ... if we get CPI tomorrow that's as big a surprise, we could test lower levels," said Greg Anderson, senior currency strategist with ABN AMRO in Chicago.
The Bank of Japan is widely seen keeping rates at 0.5 percent on Friday, but with expectations running high for a rate hike in August, investors will closely watch the post-meeting news conference by BoJ Governor Toshihiko Fukui.
Gold: Gold drifted higher on Thursday on bargain hunting after a three-month low the previous day, but analysts said the metal had potential to test fresh lows. Spot gold rose as high as $654.55 up from $647.20/$650.70 in New York late on Wednesday. "A lot of the short-term money has been taken off the table. A lot of funds have got out, but long-term holders are still there," said Jeremy East, head of metals trading at Standard Chartered Bank. "What may happen is that if it breaks that level, then the more short-term traders will be looking to get short. We are still not out of the danger zone, but we are having a bit of respite," he said, referring to gold's 200-day moving average of $638.59. The market kept a watch on the dollar, which steadied against the euro and hit a 4-1/2-year peak against the yen, extending gains after strong U.S. retail sales data the day before reinforced expectations the Federal Reserve would not cut interest rates this year. Traders said continued gold sales by central banks was bearish for the market.
Crude Oil: U.S. crude oil futures ended 2 percent higher on Thursday as refined products futures shot up on renewed supply concerns fueled by government data released Wednesday showing refinery utilization down last week and a drop in heating oil stocks. Also helping boost crude futures were signs Iran will not stop its nuclear program and OPEC is unlikely to boost output. On the New York Mercantile Exchange, July crude ended the open outcry floor session up $1.34, or 2.02 percent, at $67.10 a barrel, trading from $65.95 to $67.89.
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