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Forex outlook:
The dollar slipped against the major currencies on Tuesday as U.S. bond yields continued to retreat from five-year highs hit last week, eroding their appeal to foreign investors. At the same time, the euro retreated from a record peak against the yen and treaded water against the dollar after a surprising decline in German business confidence in June. In recent weeks, the dollar has closely tracked Treasury yields, hitching a ride higher as strong U.S. economic data boosted the benchmark 10-year note's yield to 5.33 percent and sent the euro to almost a three-month low against the greenback. But with little major U.S. economic data on tap this week to guide traders, a bond market retracement has curbed the dollar's gains and weakened the case for the Federal Reserve to boost interest rates in 2007.
"We have a light calendar this week and there's no real catalyst providing a fresh reason to buy dollars," said Bank of New York strategist Michael Woolfolk. That leaves "significant gyrations in bond prices" to lead some price action, he said. Higher U.S. Treasury yields imply higher interest rates and tend to attract return-hungry investors into U.S. assets. But since closing at 5.29 percent a week ago, 10-year note yields have slipped nearly 20 basis points over the past five sessions, the bond market's best five-day stretch in more than three months.
Markets are still expecting at least two more interest- rate hikes from the European Central Bank this year, while the Fed is seen leaving rates steady at 5.25 percent for 2007. Despite the yen's mild rise on Tuesday, market sentiment remained positioned against the currency as investors continued to borrow it at low Japanese interest rates in order to buy higher-yielding currencies. Hiroshi Watanabe, Japan's vice finance minister, said Tuesday he was watching speculative yen carry trades carefully but said they do not as yet pose a risk to Japan's economy. He also said Japan has no plans to diversify its foreign- exchange reserves away from dollars any time soon.
Gold: Gold firmed late on Tuesday, aided by weaker-than-expected U.S. housing data and oil prices near 10-month highs. Spot gold was at the day's high of 657.15/657.75, against $656.45/657.90 late in New York on Monday. Buying in gold strengthened after U.S. housing data came out weaker than expected and the euro seems to be holding above $1.3400," said Alexander Zumpfe, trader at German refiner Heraeus. A firmer dollar makes gold costlier for holders of other currencies and lowers bullion demand. The metal is also seen as a hedge against oil-led inflation. Gold has struggled to regain $700, a level last seen in May 2006. It rallied to an 11-month high of $693.60 in late April but other attempts to approach $700 met profit-taking. "Although we still see some upside potential for gold...prices will be in need of a new catalyst to revive its challenge towards higher levels," Barclays Capital said in a daily note. The bank's technical analyst said gold would need to close above a June 4 high of $674 to accelerate an advance.
Crude Oil: Oil prices eased on Tuesday, pulling back from the 10-month high posted the previous session on concerns that a strike call in Nigeria could further cut crude output in the world's eighth-biggest oil exporter. U.S. crude settled up 1 cent to $69.10, after rising $1.09 on Monday, the fourth session in a rally that has lifted prices by nearly $4. A general strike in Nigeria will go ahead as planned on Wednesday, unions leaders said, after rejecting a government offer to partially reverse a fuel price hike in the OPEC nation. "At the moment, it's all about what's happening in Nigeria. The potential for a real strike there is helping prices up," said Andrew Harrington, an analyst from ANZ Bank in Australia. "U.S. gasoline continues to underpin crude prices as refiners struggle to keep up with strong demand across the driving season," Citigroup said in a research note. Analysts expect U.S. government data on oil inventories on Wednesday to show gasoline and distillate stocks rose last week as refinery operations recovered from unseasonably low levels, according to a preliminary poll.
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