Currency Watch: Euro, Swiss Franc Remain Soft

The Swiss franc has continued to give back some of its gains in overnight trading. After seeing highs yesterday in New York of SF1.6230 the dollar has gained further ground and is opening in U.S. markets at SF1.6425 a recovery of nearly half of the 5 centimes it lost following last Thursday's Swiss interest-rate rise. As earlier, the weakness of the SF has caused some softness in the euro.

The market continues to await news on possible production increases to come out of the OPEC meetings in Vienna. Saudi Arabian Oil Minister Ali al-Naimi commented that he expected OPEC to reach an output decision that would stabilize the oil market.

Dollar/yen is trading at 106.15 after holding in a narrow range overnight. Traders see little likelihood of a major move in this relationship before the release of the Bank of Japan's quarterly tankan survey next Monday.

The euro remains subdued and has remained within its European trading range at around $0.9680.

Following yesterday's indication of "warning strike" activity to come from I G Metall, the union has now announced that it has settled a wage agreement with the employers and that there would be no strikes at DaimlerChrysler (DCX). The agreed increase for this year is for 3.0%, far below the 5.5% demanded by the union.

German Chancellor Gerhard Schroeder welcomed the agreement and said that it "supports the government's employment-oriented economic and financial policies." As noted yesterday, traders were focused on this issue, and its speedy resolution should be positive for the euro.

But the reduction of inflation pressures signaled by the settlement does suggest a lessening need for near-term interest-rate hikes in the euro zone. This effect leads Claudio Piron at Standard & Chartered Bank in London to see the euro as weak for some time to come, as "prospects for a rate hike this week have dissipated" and he remains "unconvinced Europe can match U.S. economic performance."

Euro/yen has given up most of its recent gains and the European unit has eased to 102.70 from 103.40 at the close on Monday.

In line with the general weakness of European currencies, sterling has not maintained its firmer levels against the dollar and is presently trading at $1.5860 after seeing highs of $1.5905. Euro/sterling is steady at 61. The Australian dollar has made further modest overnight gains and is holding around $0.6140. Following the pattern of this week, the dollar is weaker against the Canadian dollar and is now at C$1.4555. Traders in Toronto continue to expect at the U.S. dollar to go lower before continuing its medium term rally towards C$1.48 or C$1.49.

The New Zealand dollar has moved above the US$0.50 level during a further overnight rally and now stands at $0.5025.

The Mexican peso is steady at 9.175 continuing its strength of the past couple of months. "The currency is supported by an economic background which looks terrific, and the country has been very disciplined to keep a sound budget," said Craig Larimer at Bank One.

General opinion in the market is that the dollar has bottomed and may now build a base for a rally. So far dollar/yen has not moved above key supports and traders remain on the sidelines awaiting better opportunities to take more substantial positions. Trading is likely to be fairly directionless again today.

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