Money and Metals

Reuters reports on currencies. "The dollar hit a record low against the euro and 26-year troughs against sterling on Tuesday, as investors fretted about a possible fallout from weakness in the U.S. subprime mortgage market. The dollar also slumped nearly 1 percent against the yen, as risk-averse investors cut back on 'carry trade' transactions funded by borrowing in the Japanese currency."

"'This is a combination of unwinding of carry trades and broad dollar weakness, mainly because of what S&P did,' said Ashraf Laidi, chief currency analyst, at CMC Markets in New York."

"On Tuesday, Standard & Poor's said it may cut 612 residential mortgage-backed securities backed by U.S. subprime loans, affecting $12 billion in debt. Subprime loans are extended to borrowers with poor credit. The subprime news pushed down U.S. stocks, bond yields and the dollar across the board."

"The euro rose to $1.3741against the dollar, a record high, according to electronic trading platform EBS, before falling back to $1.3713, still up 0.6 percent on the day."

"Sterling climbed to around $2.0274 against the dollar, its highest in 26 years according to Reuters data. The British pound last traded at $2.0243, up 0.5 percent from late on Monday."

"Against the yen, the dollar fell 0.9 percent to 122.24, on track for its steepest fall since mid-March. The high-yielding Australian and New Zealand dollars dropped 0.7 percent against the yen to 105.29 and 94.91 respectively."

"Against a basket of major currencies, the dollar fell to a 2-1/2 year low around 80.822."

"Analysts also said the dollar's dwindling interest rate advantage over other currencies has hurt the greenback. Benchmark U.S. rates have held at 5.25 percent for more than a year, reducing the dollar's appeal to global investors when other major central banks such as the European Central Bank are raising rates."

"The ECB is expected to hike rates again in September to 4.25 percent. The Bank of Canada, meanwhile, raised interest rates to 4.50 percent earlier on Tuesday. The U.S. dollar rose 0.2 percent against the Canadian dollar to C$1.0514, benefiting from the Canadian central bank's less hawkish monetary policy statement."

"'It's still an interest rate differential game,' said Gregory Salvaggio, a vice president for trading at Tempus Consulting in Washington. 'The ECB is going to hike rates at least two times more this year and U.S. bond yields are falling, giving no incentive for large global investors to hold dollars,' he added."

"Lower U.S. bond yields arising from problems in the subprime sector have diminished the allure of U.S. Treasury debt."

From Bloomberg. "'There's a growing consensus in Japan that the yen has gotten too weak,' said Boris Schlossberg, senior currency strategist in New York at DailyFX.com. In August the BOJ will probably raise interest rates, 'and the wholesale prices will be a key determinant. We have reached a point where the BOJ doesn't need to see rising consumer prices before it makes its move.'"

"The yield advantage of the benchmark 10-year U.S. Treasury note versus the comparable-maturity Japanese security plummeted 12 basis points to 306 basis points yesterday, the lowest in two months."

"Gold rose to a new one-month high on Tuesday as the weaker dollar stimulated buying and investor sentiment towards the precious metal strengthened."

"Gold's comeback began the previous day when most commodity markets rallied to take leading indexes back up to 2006 highs after crude oil hit an 11-month peak and copper a two-month high. By 1358 GMT spot gold was at $662.10/662.70 an ounce, up from $660.80/661.60 late in New York on Monday and near its peak of $663.30, its firmest since June 7."

"Analysts said currency moves, notably dollar/euro, would be key to further gains, noting that gold had underperformed relative to the U.S. currency's most recent bout of weakness."

"'Gold is on the cusp of where it might possibly break up rather than down,' said Stephen Briggs, metals economist at Societe Generale investment bank."

"UBS Investment Bank noted that the last time gross long positions held by Comex and CBOT speculators were as small as they were last week was in October 2006, when gold rallied by more than $50 in the following six weeks."

"'Since last Tuesday, gold is up about $10/oz and about $25/oz from the recent low. We believe that the recent long liquidation and limited new short selling offers an opportunity to build long positions and see the metal higher on the one and three month view,' the bank said in a daily note."

"Gold has generally been stuck in a broad trading range since February, touching an 11-month high at $693.60 in April and a low of $632.30 in March."

"Three attempts to get back to the psychological $700 level have so far ended in failure, although many analysts believe this may still happen later in 2007."

"'The performance of gold was not too impressive during the first half of the year,' a trader at a Japanese trading house said. 'Portfolio managers are still watching trends of interest rates before deciding what to do with precious metals for the rest of the year.'"

"Platinum fell to $1,295/1,299 an ounce from $1,303/1,307 late in New York on Monday. Traders are waiting for further developments in wage negotiations in top producer South Africa."

"Palladium edged down to $365.50/370.50 an ounce from $367/370 in New York, while silver gained to $12.82/12.86 from $12.71/12.76 an ounce, having risen to its highest in nearly two weeks at $12.85 an ounce on Monday."