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Forex outlook:
The yen rose against the dollar and euro for a second straight day on Tuesday, as worries about fallout in the U.S. subprime mortgage sector prompted investors to unwind some trades funded by low rates in the Japanese currency. Volatile stock markets, in part stemming from concerns about the exposure of U.S. lenders to subprime mortgages in a declining housing market, have prompted some reduction in risk appetite around the world.
Further helping the yen's cause was a warning from Japanese Finance Minister Koji Omi about the weakness of the country's currency. He said at a news conference that it was important to be aware of the risks of making one-way currency bets, echoing warnings from Group of Seven officials. "The risk appetite in the market is starting to wane a little bit given anecdotal evidence of what is going on in hedge funds and equities," said Joe Francomano, vice president for foreign exchange at Erste Bank in New York. "We're into the summer months, we have a U.S. holiday next week and we've got the quarter-end. This a pretty good opportunity right now to take some profits off the table especially in carry trades," he added.
Finance Minister Omi's comments follow similar warnings from the Bank for International Settlements in its annual report on Sunday that there was "clearly something anomalous" about the yen's recent weakness. Analysts said the Ministry of Finance was unlikely to conduct any yen-buying intervention, and unless it did so, further warnings may lose their effectiveness. In carry trades, investors borrow in a low-yielding currency such as the yen or Swiss franc and invest in assets with higher returns. Adding to market talk around the yen, the International Monetary Fund's chief economist, Simon Johnson, said building global inflation pressures should provide room for the Bank of Japan to raise interest rates, which in turn would gradually reduce the yen carry trade.
Yesterday reading data for U.S. consumer confidence was lower-than-expected and larger-than-expected decline in U.S. new home sales had little impact on foreign exchange markets with investors looking to a two-day policy meeting of the Federal Reserve which concludes on Thursday.
Gold:Gold fell to its lowest in more than three months on Tuesday as softer oil prices and weakness in other metals triggered technical selling. Dealers said expectations of higher interest rates around the world also dampened sentiment, with the metals vulnerable to further drops before recovering. Spot gold fell to its lowest level since March 14."Gold has been struggling for a few days now. It's very much on the defensive. There are distinct signs of nervousness about the interest rate outlook," Stephen Briggs, economist at SG Corporate and Investment Banking, said. "Ultimately the reason that matters for gold more than anything else is because of it being an asset with no yield. The opportunity cost of holding it in a rising interest rate environment increase." A fall in gold price to the $645 area might increase the chance of an acceleration down towards the low $630s, he said.
Crude Oil: U.S. crude oil futures fell back by more than a dollar Tuesday amid expectations this week's government inventory report would show crude oil and products stocks, along with refinery usage, rose last week. That further stoked bearish sentiment after Nigeria's general strike ended Saturday without affecting exports. Crude futures fell more than a dollar early Monday but crawled back to settle above $69 on refinery snags and with buying interest attracted at session lows. "Everybody knows what everybody else knows, so people are backing and filling in a range," said Mike Fitzpatrick, vice president at Man Financial. "You'd need successive stories on the negative side of fundamentals to keep prices surging." The U.S. Energy Information Administration's inventory report due Wednesday morning is expected to show crude stocks rose 900,000 barrels last week, according to a preliminary Reuters poll of industry analysts on Monday. Gasoline stocks were expected to be up 1.1 million barrels and distillates up 500,000 barrels, the poll showed. Nigerian unions on Saturday called off a general strike. OPEC President Mohammed al-Hamli reiterated on Tuesday the producer group's contention that crude oil prices are high not because of fundamental but other factors and that inventory levels are also high. Hamli has previously identified these factors as international political tensions and refinery bottlenecks in the United States. He said OPEC did not plan to call a meeting before its next scheduled gathering in September. The International Energy Agency, representing the interests of 26 industrialized oil consuming countries, has been urging OPEC to pump more but the exporter group has said there is no need for more crude.
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