CURRENCIES: Dollar Slips As Earnings Fuel Optimism

By William L. Watts

The U.S. dollar and the Japanese yen lost ground Wednesday as upbeat results and forecasts from chip giant and economic bellwether Intel Corp. dented safe-haven demand for the low-yielding currencies.

A pair of U.S. economic reports that showed consumer prices rose in line with expectations in June and a New York manufacturing index rose more than expected put further pressure on the dollar.

The dollar fell back a little more in the immediate aftermath of the release of the minutes of the Federal Reserve's last monetary policy meeting. The minutes showed the central bank expects the economy to weaken less fast, but unemployment to rise.

Also of interest to currency traders, the notes showed the Fed remained wary of buying more Treasury bonds as part of a program it initiated this year to keep interest rates down and encourage borrowing.

With Fed-controlled interest rates at zero and very low bond yields, dollar-denominated fixed-assets are now shunned by risk-takers and are considered among the safest, along with Japanese ones.

"It's looking more and more likely that the Fed will not add to the current policy accommodation from non-traditional measures (via a more definitive policy rate commitment or increased/expedited asset purchases), unless of course the floor falls from under the economy," said Michael Gregory, market strategist at BMO Capital Markets.

Meanwhile, major currency pairs remained range-bound and continued to take short-term trading cues from the equity markets, traders said.

U.S. stocks rallied sharply on Wall Street, with the Dow Jones Industrial Average (DJI) rising more than 250 points. European equities and Asian stocks also rose.

The dollar index (DXY), which tracks the greenback against a trade-weighted basket of six major rivals, fell to 79.437 from 80.185 in North American trade late Tuesday afternoon.

The tone in equity markets was set by chip giant Intel (INTC), whose shares jumped 7% after it posted better-than-expected quarterly results and forecast.

Financial markets will continue to digest Tuesday's releases, while looking forward to earnings from J.P. Morgan Chase (JPM), Citigroup (C) and Bank of America (BAC), later this week, said Jessica Hoversen, a currency strategist at MF Global Research in Chicago.

While strong earnings from Goldman Sachs (GS) on Tuesday morning and the Intel earnings after the close encouraged risk taking, results from Yum Brands (YUM) and Altera (ALTR) were less positive, she noted.

"The greater driver of the trade will be the outlook for growth," Hoversen said.

Consumer prices in check

The euro bought $1.3964, up from $1.3933 late Monday.

Annual consumer price inflation in the 16-nation euro zone fell 0.1% in June after a flat reading in May, marking the first time inflation had turned negative since the launch of the euro a decade ago, the European Union statistics agency Eurostat confirmed Wednesday.

The figure matched a preliminary estimate released last month.

The euro posted little significant reaction to the data.

The British pound, meanwhile, rose 0.6% versus the U.S. dollar to trade at $1.6316, tracking the stronger tone in financial sector stocks.

The Office for National Statistics painted a mixed but generally gloomy picture of the U.K. labor market. The data showed the number of people claiming jobless benefits rose at its slowest pace in more than a year in June, but also showed the overall unemployment rate rose to its highest level since January 1997 in the three months ending in May.

"Sterling initially softened on the news, but cable [the British pound vs. the U.S. dollar] continues to hold above last night's close and well within the confines of its range," said Jane Foley, research director at Forex.com.

Currency markets had a muted reaction to news that the Bank of Japan decided at its two-day policy meeting that concluded Wednesday to extend its special liquidity-boosting measures for an additional three months to support the recovery.

The dollar was at 94.22 yen, compared with 93.24 yen Tuesday.

The Bank of Japan left its overnight call rate unchanged at 0.1%, as was widely expected.