Tuesday, August 13 11:31:41
The euro rose against the dollar and jumped against the yen today after a stronger-than-expected German ZEW sentiment survey added to optimism that a euro zone recovery is picking up pace.
The yen was weak across the board on a report in business daily Nikkei, which said Japanese Prime Minister Shinzo Abe is considering a corporate tax cut as a way to offset the potential economic drag of a planned hike in sales tax.
Investors who have been betting Abe will succeed in pulling Japan out of deflation have been hoping for more steps to boost the economy on top of aggressive fiscal and monetary policies.
The euro was up 1.1 percent against the yen at 130.34 yen, while against the dollar it rose to a session high of $1.33175 after the ZEW survey was released.
The German ZEW investor sentiment index showed economic conditions improved in August from July. It came after data last week showed German industry output in June surged to its fastest rate in nearly two years.
"The euro is reacting to stronger than expected data, but we are not expecting it go much higher until the central bank is prepared to change its policy stance," UBS currency strategist Geoffrey Yu said .
The European Central Bank (ECB) has pledged to keep policy accommodative and is even prepared to lower interest rates to support an economic recovery.
The euro has drawn some support from signs of stabilisation in the euro zone economy in recent weeks with yield differentials between U.S. Treasuries and German Bunds narrowing for much of this month.
Euro zone GDP data due on Wednesday is expected to show the region emerged from recession in the second quarter.
The dollar will be tested by Tuesday's U.S. retail sales reading. A Reuters poll forecast sales likely grew 0.3 percent in July after a 0.4 percent increase in June.
Strong U.S. data will encourage the Federal Reserve to trim its monthly purchase of about $85 billion in bonds, perhaps as early as September.
"We are looking at a strong retail sales number and that should boost the dollar," UBS's Yu said. "Unlike the ECB, the Fed is looking to withdraw stimulus."
The dollar was up 1 percent against the yen at 97.92 yen , rebounding from a seven-week low of 95.81 yen touched last Thursday with traders attributing much of the move to the Nikkei report.
"There have been concerns that Abe may make changes to the planned tax hike, backpedalling on reforms. But if you believe today's media report, Abe is heading for a right direction," Nomura senior FX strategist Yunosuke Ikeda said.
The tax cut report boosted Japanese shares and provided further support for dollar/yen, which has had strong a correlation with Japanese equities in recent months. (reuters)