Wednesday, August 14, 2013

Market LookBeck

(Reuters) - The euro traded little changed against the dollar on Wednesday despite data showing the euro zone had emerged in the second quarter from its longest recession since its inception.

The euro initially jumped on the news but elevated U.S. Treasury yields and growing expectations the Federal Reserve will begin to scale back stimulus as early as next month continued to bolster the dollar, and the euro's gains faded.

As the New York session began, the dollar's strength against the euro was blunted by a report that showed U.S. producer prices were flat in July, pointing to very little inflationary pressure, which could add to worries at the Fed that inflation is running too low. The dollar fell against the yen.

"The recent weakness in the euro is not so much a function of any fundamental problem in the region but rather a reaction to the strengthening dollar as the market continues to price in the prospect of a taper (of Fed bond buying) in September," said Boris Schlossberg, managing director of foreign exchange at BK Asset Management in New York.

The euro was last little changed at $1.3257, off an earlier high of $1.3278. Traders cited stop-loss sell orders below $1.3230 and a break there could see it slip to $1.3155/85.

With stronger-than-expected growth in the currency bloc's largest economies, Germany and France, hauling the euro zone out of six consecutive quarters of contraction, analysts said a fragile recovery was probably taking hold.

The euro zone economy grew 0.3 percent, beating the 0.2 percent forecast of economists in a Reuters poll, but this failed to push the euro much higher than its level after the numbers from the two big economies were released.

"Today's improvements in second quarter, 2013 GDP across the board - French, German, and broader euro-zone figures all beat expectations - failed to produce a positive reaction in the euro despite the implications of a rebounding Europe," said Christopher Vecchio, currency analyst at DailyFX in New York. "Certainly, failure by the euro to appreciate on strong data may be a warning sign that further weakness is due."

With recovery in the euro zone still fragile and some of its peripheral economies still struggling, the European Central Bank is expected to keep rates at record lows for an extended period.

By contrast, expectations that the Fed will "taper" its monthly $85 billion in bond buying from September were gaining momentum.

Atlanta Fed President Dennis Lockhart said on Tuesday he could not rule out the Fed reducing stimulus from next month but added that U.S. economic performance was too mixed for the U.S. central bank to lay out a detailed plan.

The dollar was down and off Tuesday's one-week high against a basket of currencies, a high that was hit after upbeat U.S. retail sales data sent Treasury yields sharply higher. Ten-year Treasury yields last stood at 2.71 percent on Wednesday, just shy of July's 23-month high.

The dollar index edged down 0.07 percent to 81.712, having climbed more than 1 percent from its Aug. 8 trough.

Traders reported steady corporate demand for dollars and said further gains would hinge on upcoming U.S. data. Attention now shifts to Thursday's release of U.S. industrial production and consumer inflation reports.

Sterling rose 0.4 percent against the greenback to $1.5507, however, as market participants brought forward expectations of a Bank of England interest rate hike on improving UK data and a surprise division among policymakers over the bank's rate guidance. The pound is the best performing of the 36 most actively traded currencies against the dollar month-to-date with a 2.1 percent gain.

The dollar was down 0.1 percent at 98.10 yen and traders said a move above 98.50 looked difficult in the near term.