Dollar hits 2 ½ months low vs Yen on US sub-prime worries

The sharp fall in oil prices on Tuesday (Brent crude fell $3 per barrel to around $76) shows the lack of support at these high levels. the wobble in prices illustrates the vulnerability of prices when speculative long positions are close to record highs. Analysts continue to expect Brent crude to fall to around $65pb by year-end.

The Bank of Japan is expected to raise interest rates at only a glacial pace this year, posing little threat to the carry trade. But worries that weakness in the US sub-prime mortgage market is spreading to the wider economy could cause a flight from risky assets -- leading to a rush to buy back yen.

The Yen already surged across the board on Tuesday as growing turmoil in U.S. credit markets led investors to bail out of stocks and risky trades financed by borrowing in the Japanese currency.

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The sharp fall in oil prices on Tuesday (Brent crude fell $3 per barrel to around $76) shows the lack of support at these high levels. The immediate triggers appear to be linked to two developments involving Iran: signs of progress in talks between Iran and the UN nuclear watchdog agency IAEA, and comments from an Iranian official that OPEC would increase production if required to cap prices.

But whatever the precise reasons, the wobble in prices illustrates the vulnerability of prices when speculative long positions are close to record highs. Analysts continue to expect Brent crude to fall to around $65pb by year-end.

The yen surged across the board on Tuesday as growing turmoil in U.S. credit markets led investors to bail out of stocks and risky trades financed by borrowing in the Japanese currency. The yen rallied sharply as mounting worries about the housing market drove some major U.S. stock indexes down nearly 2 percent by the close. The Dollar also sank to a record low against the Euro. Some analysts said "We're teetering very close to the edge of a carry trade unwind, actual view is that there are reasons to bail out right now".

The yen, the lowest-yielding currency in the industrialized world, has been a popular financing vehicle for speculators investing in higher-yielding assets of countries such as Australia and New Zealand through so-called carry trades. As investors unwound some of those bets, the yen fell about 0.7% against the currencies of both countries on Tuesday.

UsdJpy sank 0.57% to 120.27 yen after touching a two-month low of 120.00. Meanwhile, the EurJpy dropped 0.44% to 166.20. EurUsd jumped to a record high of 1.3852 before settling back at 1.3820 up 0.14% on the day. GbpUsd climbed to a 26-year high 2.0654 before settling back at 2.0610 up 0.09%.

The Bank of Japan is expected to raise interest rates at only a glacial pace this year, posing little threat to the carry trade. But worries that weakness in the US sub-prime mortgage market is spreading to the wider economy could cause a flight from risky assets -- leading to a rush to buy back yen. If problems stemming from the sub-prime market spread to other sectors, foreign demand for U.S. corporate debt -- a major source of financing for the trade deficit -- could waver and further hurt the dollar, some analysts say.

Given the market's sensitivity about the health of the housing market, US existing home sales data due on Wednesday and new homes sales due on Thursday are likely to be major centers of attention this week.

Both precede the first reading of second-quarter US Gross Domestic Product, due on Friday, which will indicate to what extent the economy bounced back from the January-March period, it most sluggish quarter of economic growth in more than four years. The latest plunge lower in the dollar coincided with a report showing Canadian Retail Sales in May had the biggest increase in nearly a decade, pushing the Dollar to a 30-year low against the Canadian dollar of 1.0340. __________________