An air of calm prevailed in foreign exchange markets Wednesday after the previous day's rout with the dollar reversing losses against the yen, the euro and the Swiss franc and emerging market currencies were also able to recover some ground.
Tuesday the dollar had posted its biggest one-day loss against the yen in more than three years, touching a low of Y95.94 against the yen. The move was sparked by markets' disappointment that the Bank of Japan hadn't announced more stimulus measures as well as continued speculation that the Federal Reserve will start to slow its pace of asset purchases.
"After a such tumultuous day, with a wash across emerging market currencies, commodity currencies bonds and stocks, we are seeing some of the moves reversing, especially on commodity currencies. The euro is consolidating and the yen is slightly retracing after yesterday's huge move," said Gavin Friend, analyst at National Australia Bank.
The euro was trading again below the $1.33 mark against the dollar in the morning, down from a near four-month high of $1.3335 reached in Europe early Wednesday. The Swiss franc reversed Tuesday's climb against the dollar, which was fuelled by safe-haven inflows.
The extreme sell off on Tuesday in emerging market currencies, which hit the Indian rupee, the South African rand, the Turkish lira and the Mexican peso in particular, was also partially reversed Wednesday. The Turkish lira regained ground against the dollar, which fell back to around TRY1.8780 against the lira from Tuesday's December 2011 high of TRY1.9098.
"Some of the emerging market currencies are down by 20% since the beginning of the year. The sell off seen over the last days has been driven by concerns over the future policy of the Federal Reserve, but also by a slow down in Chinese economic growth which is taking its toll on commodity currencies such as the Australian dollar," Mr. Friend said.
A light data calendar added to the quiet tone to trading. Euro-zone industrial production rose 0.4% month-on-month in April against a no growth forecast, but was not enough to trigger a strong market reaction, while better-than-expected U.K. labor market data led to a slight bounce in the pound, which touched a high of $1.5681 against the dollar.
"The release highlights that the prospects for more easing should remain rather subdued in the very near term. Sterling could remain supported on the back of positive data surprises going forward," said Valentin Marinov, head of European G-10 foreign exchange strategy at Citigroup.
Looking ahead, markets will closely follow the second day of the German Constitutional Court hearing in Karlsruhe on the European Central Bank's government bond purchase plan. A decision by the court isn't expected earlier than September, with the possibility of a deferral to the European Court of Justice, which would leave financial markets in a prolonged period of uncertainty.
At 1105 GMT, the euro was trading at $1.3286 against the dollar, compared with $1.3314 late Tuesday in New York, according to trading system EBS.
The dollar was at Y96.54 against the yen, compared with Y96.04, while the euro was at Y127.70 compared with Y127.82. The pound was trading at $1.5662 against the dollar, compared with $1.5653 late Tuesday in New York.
The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, was trading at 73.104, compared with 73.626 late Tuesday in New York.
A summary of key levels for chart-watching technical strategists is below:
Forex spot: EUR/USD USD/JPY GBP/USD USD/CHF
Spot 1045 GMT 1.3282 96.58 1.5661 0.9277
3 Day Trend Bullish Range Bullish Bearish
Weekly Trend Bullish Bearish Bullish Bearish
200 day ma 1.3036 91.62 1.5552 0.9391
3rd Resistance 1.3434 97.78 1.5845 0.9418
2nd Resistance 1.3335 97.30 1.5782 0.9349
1st Resistance 1.3317 97.03 1.5684 0.9310
Pivot* 1.3288 96.89 1.5610 0.9273
1st Support 1.3273 96.09 1.5614 0.9223
2nd Support 1.3256 95.59 1.5571 0.9206
3rd Support 1.3222 94.97 1.5538 0.9185
Forex spot: EUR/GBP
Spot 1045 GMT 0.8482
3 Day Trend Bearish
Weekly Trend Bearish
200 day ma 0.8385
3rd Resistance 0.8550
2nd Resistance 0.8535
1st Resistance 0.8504
Pivot* 0.8519
1st Support 0.8470
2nd Support 0.8442
3rd Support 0.8421
