Yen Strengthens Further

The U.S. dollar's mixed performance reflects the fact that right now it is not the fulcrum in the foreign exchange market that it often is.

Rather the continued parting of short yen and, to a lesser extent, short Swiss franc positions is the key development among the major currencies. This helps explain the softer bias in the euro and sterling and the firmer bias of the yen and Swiss franc. For the fifth consecutive session the euro is holding above the previous day's low. The upside appears capped in the $1.3240-60 area. A poor ISM reading in the U.S. today, with what could be the second consecutive monthly print below the 50 boom/bust level could see that ceiling tested. The dollar briefly and narrowly rose through yesterday's high against the yen, but has since reversed and is testing the JPY118.00-JPY118.10 support. A retest on the JPY117.50 spike low on Tuesday appears likely. Note that key technical levels are just below there: the 200-day moving average today comes in near JPY117.45, and JPY117.40 is the 61.8% Fibonacci retracement target of the dollar rally to the JPY1122.20 area in late January and early February from JPY114.40 in early December.

There have been several developments that ought not be obscured by the on-going jitters in the equity markets.

First, some observers linked former Fed chief Greenspan's comments about the U.S. economy to the equity market sell-off. As often happened when he was in office, many seem not to understand what he said. Even though he reportedly spoke in a private session in Tokyo today, he did appear to clarify what he may have been misunderstood to have said earlier in the week. We understood his comments earlier in the week as a mostly academic discussion of the business cycle. A business expansion is like a person. It can die of old age. It need not be murdered by policy makers. The U.S. business cycle is mature and it possibly could turn down by the end of the year, although he acknowledged most economists did not think a recession this year was likely. Today reports suggest that the Maestro said that while a recession was possible, it was not probable. His successor Bernanke was even clearer. The Federal Reserve continues to expect U.S. economic growth to pick up and return toward trend. Nevertheless, the market seems to be insisting that the Federal Reserve is asleep at the switch.