Daily Forex Overview

Previous session overview

The US dollar ended sharply lower after global risk sentiment turned positive again Tuesday, sending the U.S. currency to a succession of multi-week lows against currencies such as the euro, yen and Swiss franc.

The US dollar's fall emerged out of a greater appetite for risk following a more risk averse climate Monday.

Investors and market players have been prone to erratic mood swings recently, and their relatively sunnier dispositions Tuesday were reflected in higher crude oil prices and U.S. equity prices that wavered narrowly between positive and negative territory throughout the day.

The healthier risk environment was also supported by more encouraging economic data from the U.S. and elsewhere.

U.S. existing-home sales rose in May for a second month in a row, and the Federal Reserve Bank of Richmond indicated an improvement in the manufacturing sector.

In the euro zone, the latest German consumer confidence and euro-zone purchasing managers' surveys were taken as evidence that the worst of the downturn has passed, supporting risk appetite out of the safe-haven dollar.

Comments from European Central Bank officials have also been helpful for the euro, as ECB Governing Council member Guy Quaden said the euro zone's economy will be "less bad" for the rest of the year before improving progressively in 2010, and fellow ECB council member Axel Weber said the central bank has done enough in terms of easing.

Although these developments helped global risk appetites to recover, the magnitude of dollar losses versus the euro and some other currencies was somewhat disproportional Tuesday, testifying to the still volatile and jittery tone in currency markets in the absence of a firmer and more durable directional trend.

The dollar sold off sharply early and then extended its losses as European traders began exiting around midday, in the process sending the dollar to its lowest level in over a week against the euro, and to three-week lows versus the yen and the Swiss franc before a modest recovery toward the end of Tuesday's session.

Market expectation

The dollar and euro gained slightly against the yen in Tokyo Wednesday as Japanese trust funds bought those units to purchase overseas assets.

Anticipation of such investments, which the trust funds regularly make at month's end, prompted some short-term players to buy the dollar and euro earlier in the morning, dealers said.

But dealers said the scale of the dollar and euro buying was relatively small and unlikely to send the currencies significantly higher later in the day. Most players were reluctant to make big bets, particularly on the dollar, ahead of a U.S. Federal Open Market Committee meeting scheduled for later in the global day, they said.

That is because the FOMC statement is expected to contain few dollar-positive cues, as it seems to be more cautious about the prospect of an economic pickup than market players, dealers said. That would also confirm the view that the Federal Reserve will take more time before deciding to end its ultra-low 0-0.25% policy interest rate, they said.

Should the FOMC statement emphasize lingering downside risks to the economy, as expected, that could also put short-term downward pressure on long-term interest rates, dealers said.

Dealers said after the FOMC meeting, the dollar may also further weaken against the yen as Japanese firms repatriate overseas earnings ahead of the half-year end at the end of June.

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