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Forex outlook:
The dollar traded near a three-week low against the Euro on speculation a report will show U.S. home sales fell to the weakest in almost four years. For most of last week trading in EURUSD was lackluster at best as the pair continued to travel the familiar 1.345-1.3350 path remaining range bound as it has the week prior and the week before that. Indeed up until on Friday, the bias in the EURUSD was actually dollar bullish as the most recent economic data proved supportive of the greenback. The currency was also close to trading above $2 per British pound for the first time since May 2, as traders increased bets on a Federal Reserve interest rate cut. The yield premium on U.S. two-year Treasuries over similar-maturity German debt narrowed to a 2 1/2-year low. ``The dollar's yield advantage has waned,'' said Sue Trinh, a foreign-exchange strategist at RBC Capital Markets in Sydney. ``The market is vulnerable to weaker housing data and that will weigh on the currency.''
The yen was pinned near a 4-1/2-year low against the dollar and an all-time trough versus the euro on Monday, staying under pressure as investors kept selling the low-yielding currency in carry trades. There aren't many people who want to buy yen," said a senior trader at Japanese bank. Traders said the market was bracing for a deeper yen slide as a variety of Japanese investment trusts targeting foreign assets were expected to be launched this week, luring funds from households putting their summer bonuses to work. “Traders feel safe to sell the yen because a weakening yen is supportive for Japan's economy, and there are no strong attempts by policy makers here to stop the falling yen," said Kengo Suzuki, currency strategist for Shinko Securities.
The New Zealand dollar recovered all the losses it incurred on suspected central bank intervention in the late U.S. session on Friday, striking a 22-year high against the dollar and climbing near a 20-year peak against the yen. Investors kept putting on carry trades by borrowing in low-yielding currencies like the yen to fund investment in higher-yielding currencies, brushing aside shaky equity markets and the Reserve Bank of New Zealand's suspected third bout of selling in two weeks to limit kiwi strength .
We have some important Data coming from the U.S for the coming week, the housing market reports and the FOMC interest rate decision. Although both new and existing home sales are expected to be weaker, do not underestimate the potential for an upside surprise. DQNews, a firm that tracks real estate sales in key areas like California, Florida and Nevada reported a 5.8 percent increase in California home sales in May. As for the Fed, the up tick in oil prices and the still lofty level of the Dow should prevent them from making any major changes to their monetary policy statement. Expect them to continue to be hawkish about inflation risks, regardless of whether they see bigger problems in housing. The economic calendar in England is light but Prime Minister Tony Blair steps down next week, which will be a big focus.
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