Technicals

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The Dollar rose versus the Yen on Monday as US stocks recovered some losses despite renewed fears financial institutions might be forced to write down more mortgage-related assets and raise capital.

Lehman Brother cautioned on Monday that accounting changes could force Fannie Mae and Freddie Mac, the largest providers of funding for US home mortgages, to raise capital at a difficult time. Shares of Fannie Mae and Freddie Mac plunged, dragging US financial shares and the broader stock market down. Stocks later regained some lost ground, pushing the Dollar higher against the Yen.

Instability in the US financial sector could complicate matters for the Federal Reserve, whose recent tough stance on inflation had been interpreted by many market participants as an intention to raise interest rates later this year. Such a step would help narrow the interest rate differential between the Dollar and the Euro, in the wake of the European Central Bank's 25bp rate hike to 4.25% last Thursday.

The Dollar eased against the Euro with an Oil price drop from last week's record peak of 145.85 and an unexpected fall in euro-zone investor morale to a three-year low in July. Yesterday, EurUsd was up 0.19% at 1.5725, recovering from earlier drop as low as 1.5611. UsdJpy rose 0.87% to 107.69, as stocks regained some ground. UsdChf was only 0.05% up at 1.0261 dropping from earlier 1.0343 high. GbpUsd went 0.31% down at 1.9763 after hitting 1.9649 low.

The Dollar got also some support from comments by San Francisco Federal Reserve Bank President Janet Yellen that inflation was starting to outweigh the risk of a deteriorating US economy. Yellen's remarks indicated that the Fed could be leaning toward raising interest rates. Market attention was also focused on the annual summit in Japan of the Group of Eight industrialized nations. G8 leaders aim to present a united front against global inflation, driven by soaring oil and food prices, but analysts say solving the problem will require input from developing as well as developed countries. Investors are also keen to see whether G8 leaders would mention this year's weakness of the U.S. dollar, although many doubt that officials will call for concrete action.