The dollar slipped against the euro on Wednesday after a weak report on US orders for durable goods shook the conviction of traders who had made short-term bets on the US currency.
Later in the session, dealers said other traders were probing the market for automatic stop-loss buy orders in the euro, hoping for an acceleration in the move which would squeeze out bets against the euro zone currency.
"I think this is a stop-driven market. That's been the case for the past two weeks," said Tim O'Sullivan, trading manager with GAIN Capital.
"When you hunt around and a currency squirts in one direction, it probably means that someone had a stop they just couldn't handle," he added.
For the euro, that came just after the durable goods report triggered stops above technical resistance around $1.2250-60.
By late afternoon, the euro was up 0.4 percent compared with late Tuesday to $1.2275, nearly revisiting a high of $1.2280 reached just after the durable goods data.
Durable goods orders fell 4.9 percent in July from June, compared with analysts' forecasts of a 1.2 percent decline. Orders for non-defence capital goods items excluding aircraft, often considered a proxy of overall business spending and investment, were down 3.7 percent.
June orders data were revised lower on both fronts too, and the report's overall weakness triggered a move up in the euro through key technical resistance around $1.2250.
"A pretty weak number. It's very hard to spin this as anything but dollar-negative," said Lara Rhame, vice president and currency strategist at Credit Suisse.
Meanwhile, new home sales in the US last month rose 6.5 percent to a record high.
On there own, these data are unlikely to sway the Federal Reserve from its long-stated aim of raising interest rates at a "measured" pace.
Traders said that an official account capped the euro's initial move higher this morning. Once those offers left the market around mid-session, the euro steadily crept higher.
"It's not exactly a rip-snorting move. It's a nice slow grind in a summer market," said a trader with a mid-sized US bank.
Against the Canadian dollar, the US currency dropped to fresh lows for the year below C$1.19 due to scheduled payments to Canadian energy companies. Crude oil contracts rose to a new record high of $67.40 per barrel.
The dollar clung to small gains against the yen, at 110.17 yen, up 0.2 percent.
The yen struggled broadly after rallying this month on optimism about Japan's economy, with the Nikkei stock index hitting 4-year highs, and on perceived support for Prime Minister Junichiro Koizumi and his reform plans ahead of a September election.
Richmond Fed President Jeffrey Lacker said last week he had become more worried about inflationary pressures.
Investors are looking to see whether Moskow shares those concerns and gives any hint on how high US interest rates could go beyond the market's expectations for 4 percent.
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