Forex markets seem to have had something of a confused reaction to yesterday's strong dollar rally.

This morning the yen has staged a solid recovery and has recouped all of its losses of yesterday. The euro, on the other hand, has barely made any recovery overnight and has pulled other European currencies down with it.

The yen saw lows of 108.35 overnight but is opening much stronger in New York around 107.15.

The market seems to have reassesssed the significance of the announcement of the bankruptcy of the department store operator

Sogo

. Initially this was seen as a negative and as lowering the chance of a rate hike by the

Bank of Japan

. Later the forex market has seen the bankruptcy as a more positive development, suggesting that the Japanese government has accepted the need to let market forces determine winners and losers in the economy.

This change of heart over the yen has then fed back to the euro through the euro/yen cross rate, with the euro suffering as a result. From levels around 102 yen per euro at the close last night, the cross is now standing at 100.25; a decline of 1.75%.

"I think the main issue is the unwinding of euro/yen positions," said Derek Halpenny of

Bank of Tokyo Mitsubishi

. "For at least a month euro/yen has been the popular trade and the market was bullish on the euro and selling the yen was the line of least resistance. Now the euro doesn't look good again," he said.

Opinion is equally divided over the likelihood of an interest rise in Japan on Monday. Halpenny is in the camp favored by the trading community which expects a rate rise even if it is not seen as good policy. "If they do 25 basis points, that could be it for some time. I think they will go even though they may be outside of their mandate which is an inflation mandate," Halpenny said.

Japanese industrial output rose a revised 0.3% month-over-month in May.

The euro is opening at $0.9355, 1% down from overnight highs.

Euro zone

GDP

rose a revised 0.9% in the first quarter of the year and 3.4% year-on-year. This improved on prior estimates.

With signs of slightly higher inflation in the euro zone,

European Central Bank

spokesmen have played down the significance of any

CPI

increase over the official 2% per year target. " If the next harmonized Consumer Price Index in the euro zone is above 2% ... you shouldn't expect a mechanical, nervous reaction from the ECB," said

Eugenio Domingo Solans

, an ECB board member.

Yesterday, the pound closed lower at $1.5070 and this weakness has been maintained overnight with cable now trading around $1.5020. Euro/sterling has moved in favor of the pound and is opening around 62.25 pence.

The

British Chamber of Commerce

has reported a further slowing of U.K. manufacturing with exports particularly hard hit.

Dollar/Swiss franc is dramatically firmer at 1.6595. The euro is weaker vs. the Swiss franc at SF1.5530. The Swiss franc continues to be hurt by the market's concern over M&A outflows from Europe.

U.S. dollar/Canada is modestly firmer at C$1.4820.

There was little reaction to the announcement of Canadian CPI for June, which showed the core rate at 1.4% year-on-year and the all-items rate up by 2.7%. The data were in line with expectation.

The Australian dollar is steady at $0.5890. Australian unemployment fell to 6.6% in June, the lowest since May 1990.

The New Zealand dollar is slightly firmer at $0.4615.

The Polish zloty is a little lower at 4.32 per dollar.

The South African rand is weaker at 6.86.