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Tuesday February 22, 2005 - 09:48:01 GMT

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FX Daily Technical Strategy

Dollar tumbles to five-week low versus euro


The dollar fell to a five-week low against the euro on Tuesday as profit-taking on carry trades and the break of key technical levels triggered waves of buying in the yen and the single European currency.

Investors looking for higher yields drove the New Zealand dollar to a 22-year high against its U.S. counterpart. The currency has been the market's star performer in past weeks as New Zealand's interest rates are the highest among developed nations.

This has prompted investors' interest in carry trades borrowing in low-yielding currencies, like the yen, to sell for higher yielding ones particularly as currencies have lacked clear direction in past months.

But some analysts noted that currency movements on Tuesday were not based on economic fundamentals, adding that the buyback in the yen was a sign that carry trades would have limited impact on the market in the longer term.

By 06h57 GMT, the euro was at around $1.3170 after climbing to around $1.3175, its highest level since mid-January.

The euro has rebounded more than 3 percent from a three-month low around $1.2730 hit earlier in the month.

The dollar fell to as low as 104.58 yen, easing one yen from the session's high, with Japanese exporter selling of dollars for yen adding to the early pressure.

The dollar's slide against the yen sparked euro buying and triggered stop-loss orders that further boosted the single European currency, which had been stuck between $1.3000 and $1.3100 for three straight trading sessions.

Foreign funds were seen selling the euro against the yen, taking profits after the euro hit a six-week high on Friday.

That took the euro down as far as around 137.25 yen, before the currency recovered to 137.85 in late Tokyo trading.

The yen hardly reacted to minutes of a Bank of Japan policy-setting meeting held earlier in the month in which the central bank discussed the need to lower or allow for a temporary breach of its liquidity target.

Traders said yen buying was also prompted by comments from North Korean leader Kim Jong-il on Tuesday that his country would return to six-party talks on nuclear disarmament if conditions for resuming stalled discussions were to its liking.

At the same time, the South Korean central bank's statement on Monday that it would diversify its foreign exchange reserves holdings to include a variety of currencies, rather than keeping a large portion of it in U.S. assets, added further pressure to the dollar/yen.

Many traders said the market was looking for an opportunity to sell the dollar after dealers were caught off guard by the U.S. currency's rebound at the start of 2005 from a record low against the euro late last year.

Some in the market said they were considering lightening their long-dollar positions given that the dollar's rally had fizzled into a stalemate against both the euro and the yen.

"The market is ready to be bearish on the dollar," said the head dealer at a European investment bank.

The dollar's slide comes as the market focuses on U.S. consumer inflation data due on Wednesday for any hint that accelerating price pressures could prompt the Federal Reserve to step up the pace of its credit tightening campaign, which would be a positive for the dollar.

After data on Friday showed core U.S. wholesale prices jumped sharply in January, the market was bracing for any further signs of inflation accelerating more than Fed officials would like.

A faster pace of U.S. rate increases would likely boost the dollar, though traders and analysts say that worries about the United States' ability to fund its massive current account and budget gap have not gone away.


EURO/DOLLAR: The euro penetrated an array of resistance containing between $1.3090-1.3140 in the Asian trading session today. Prices are on their way to check the 50 percent Fibonacci resistance of this year's downward move at the $1.3200 mark. On the back of slightly overbought intraday charts, a dip to $1.3130 and $1.3110 is likely. Having said that, the upside breakout looks impulsive and there is a possibility that the move could further extend to $1.3230/60 resistance band in coming sessions.

STERLING/DOLLAR: Cable drilled through the 50 percent Fibonacci obstacle of Dec-Feb slump this morning at $1.9030; accelerating the intensity of the upside move. The pair is chasing the $1.9150 obstacle, the 62 percent Fibonacci resistance of the above mentioned bearish leg.


DOLLAR/YEN: The pair is trading around the lower end of a month-old rising channel at 104.90/70, which is also the 38.2 percent Fibonacci support of the recent rally. A decisive and sustained move below this level would set up ideal conditions for an additional slump towards the 104.30/20 floor. Falling daily oscillator models are exerting pressure on the pair.


@ 15h00 GMT: U.S. February Consumer Confidence


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