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Forex outlook:
The dollar fell to a 15-year low against a basket of major currencies and a record low against the euro on Tuesday, hurt by fears of worsening credit woes and persistent weakness in the U.S. housing market. If problems stemming from the deteriorating U.S. subprime mortgage market spread to other sectors, foreign demand for U.S. corporate debt, a major source of funding for the trade deficit, could waver and further hurt the dollar, analysts said. Reflecting the dollar's broad-based weakness, even the Japanese yen, which has fallen to repeated record lows against the euro this month, rallied against the greenback.
"The drop in USD/JPY appears to be primarily the result of intense pressure on the dollar from the subprime situation," strategists at Scotia Capital wrote in a note to clients. The euro jumped to a record high of $1.3853, according to electronic platform, before settling back, up 0.1 percent on the day. The dollar sank to a two-month low of 120.42 yen, and sterling climbed to a 26-year high of around $2.0655. The dollar regained some ground against the yen to trade at 120.50 yen but was still down 0.4 percent.
Weakness in the subprime or risky mortgage sector is spreading to some segments of credit markets, forcing investors to flee to relative safety over the last few weeks by buying top-rated government bonds and selling the dollar for almost all other major currencies. Given the market's sensitivity about the health of the housing market, U.S. existing home sales data due Wednesday, and new homes sales due on Thursday, are likely to be a big focus this week. Both come ahead of the first reading of second-quarter U.S. gross domestic product, due Friday, which will indicate to what extent the economy bounced back after its most sluggish quarter of economic growth for more than four years in January-March.
The latest lunge lower in the dollar coincided with a report showing Canadian retail sales in May had the biggest increase in nearly a decade, pushing the greenback to a 30-year low against the Canadian dollar. The Canadian dollar is edging ever closer to parity with its U.S. counterpart, something not seen since 1976. The U.S. dollar's broad move lower after the Canadian retail sales numbers supported a view that benchmark U.S. interest rates will remain steady while others rise.
Indeed, the New Zealand dollar rose above US$0.8100 to the highest since being floated in 1982, ahead of a policy meeting on Thursday at which the Reserve Bank of New Zealand is expected to raise what are already the highest interest rates in the industrialized world.
Gold: U.S. gold futures finished higher after touching a 2-1/2-month peak on Tuesday as the dollar fell to a record low and as investor sentiment turned bullish after prices surged above the previous session's high. "Everything is dollar-related," Carlos Perez-Santalla at Hudson River Futures said from the COMEX floor. "It started off as a light, quiet day and it built up with some fund buying as the market climbed above yesterday's high." Perez-Santalla said that gold futures' momentum was largely driven by dollar weakness in the past few days. "Friday's high is the key. If we close above Friday's high, we will see much higher," he said. Last week, gold futures gained nearly $18, or 2.6 percent, as the dollar fell on worries related to the U.S. subprime mortgage sector.
Crude Oil: U.S. crude oil futures ended lower for a third day in a row as traders expected Wednesday's U.S. government inventory data to show that fuel supplies rose last week as refineries ramped up production. Word from Iran adding further ssurances on OPEC's readiness to inject supply into the market as needed also stoked selling for the day, traders said. "The market is anticipating that refinery runs will be up as more refineries are going back to service, so gasoline and with it, crude, are down today," said Andy Lebow, broker at MF Global, New York. "After soothing statements by the OPEC president yesterday, and the statement (out of Iran) today that, in case the oil market needs it, OPEC will inject more oil, the crude complex is in a free-fall," said Nauman Barakat, senior vice president at Macquarie Futures USA. Support was charted at $72, below the 20-day moving average of $72.59. The next inventory report from the U.S. Energy Information Administration on Wednesday was expected to show refinery use rose again last week, helping boost refined products. An expanded poll of analysts on Tuesday yielded a forecast for distillate stocks, which include heating oil and diesel fuel, to have fallen 800,000 barrels last week and for gasoline to have dipped 400,000 barrels. Crude stocks were forecast to show a 1.2-million-barrel drawdown on increased refinery use expected to have risen 0.8 percentage point, to 91.8 percent of capacity.
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