Dollar Weakens as Softer Beige Book Keeps a Fed Pause on the Table (page 2 of 2)

The index shrank from -12 to -11 versus the market's -10 forecast. The quarterly business sentiment survey also fell from -2 to -6 in the second quarter, against expectations for an improvement to zero.

Even so, over the past two weeks, we have seen mild improvements in the economic health of the UK economy. Yet, mild improvements will not be enough to prompt the Bank of England to raise interest rates in August which means that the divergence between their monetary policy stance and the ECB's stance will be increasingly clear. In fact, we are already seeing a recovery in the EUR/GBP. With no more UK data scheduled for release this week, there could be scope for a further recovery in the cross as traders hone in on the two country's fundamentals.

Japanese Yen

The performance of the Japanese Yen was very mixed against the majors, but the outlook for the country's monetary policy is not. Bank of Japan monetary policy member Suda said today that he believes interest rates need to adjust "in a way that isn't behind the curve" and added that it is not of the question for the central bank to raise rates again in 2006. Given that Suda is one of the more hawkish members of the BoJ, his comments are not extremely surprising.

However, it does validate the possibility that their use of the word gradual is similar to the Fed's use of the word measured. If so, the BoJ could deliver another interest rate hike in the fourth quarter, after the market has fully absorbed the last rate hike and has begun to quietly price in another one.

Meanwhile Japan's trade surplus increased from Y382 billion to a slightly less than expected Y807 billion. Exports experienced double digit growth for the eight straight months, fully offsetting the increased oil contribution to import values. China continues to remain on our radar screens as the possibility of another revaluation move grows. China's Chief Economist of the State Information Center said last night that the best way to ease the trade surplus is through an appreciation in the Yuan.

New Zealand Dollar

Finally, the Reserve Bank of New Zealand kept interest rates unchanged at 7.25 percent tonight. Governor Bollard told the markets not to expect any more moves soon - he said that there will be no more rate hikes this cycle and doesn't expect to cut rates for some time. With slowing economic growth, it is unlikely that the central bank will move on interest rates any time soon.

Like in EUR/GBP, the divergence in the monetary policy of Australia and New Zealand has also become increasingly clear, leading to a strong recovery in AUD/NZD. The Reserve Bank of Australia is now expected to raise interest rates by 25bp as early as August.