* The dollar was lower versus the commodity currencies on Monday but higher against other key currencies. Asian and European stock markets rose, but the S&P 500 declined a modest 0.56 points to 1,025.57. The yen fell modestly as Nikkei rallied over 3%. Sterling dropped for a fourth day, struggling to stay above the 1.64- handle support The Australian and Canadian dollars gained for a fifth straight day, boosted by higher commodity prices. The loonie was also supported by Canada’s better-than-expected retail sales.
* The EUR/USD fell for the first day in five. European Central Bank President Trichet stated that the economic recovery would be uneven and the ECB would not exit emergency stimulus soon. Today’s release on strongerthan- expected eurozone industrial new orders did not substantially support the EUR/USD. The pair has been highly correlated with risk aversion and equity markets. The risk appetite trades may explain why the US-EMU 10-year interest spread has broken down since April. Usually higher US interest rates would pressure the EUR/USD as shown in the 10-year interest rate chart (below the EUR/USD chart). However, the US 10-year yield has risen relatively to the European yield, while the euro rose. We believe a renewed focus on the yield spread or a possible correction in the stock market may pressure the EUR/USD. There are resistance in the 1.44-1.45 area and supports from the long-term uptrend and in the 1.40-area.
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