Forex

During early European deals on Tuesday, the US dollar declined to 5-day lows against the yen and the franc as a decline in stocks prompted investors to flee from carry trade activity. In carry trade, traders borrow money from countries like Japan and Switzerland, where interest rates are very low, and invest elsewhere, seeking higher returns. The risk is currency fluctuations erase profits between the two rates.

Against the franc, the dollar edged down after hitting a high of 1.0294 at 10:25 pm ET Monday. The dollar-franc pair dipped to a 5-day low of 1.0222 by about 4:30 am ET Tuesday. The pair was worth 1.0269 at yesterday's New York session close.

Federal Reserve Bank of San Francisco President Janet Yellen said Monday market conditions "could get worse before they get better", but that she expects market functioning to "improve markedly" by 2009. Speaking at the University of California in San Diego, Yellen said inflation risks have "definitely" increased and that the housing sector will likely face more "unpleasant changes." She said policy is now at a crossroads as it faces competing risks between inflation and growth, though the Fed president said she is "somewhat reassured" by recent data showing no signs of general wage pressure.

During early deals on Tuesday, the dollar trended lower against the Japanese yen. The pair that closed yesterday's trading at 107.18 slumped to a 5-day low of 106.27 by about 5:00 am ET.

On the economic front, Japan's monetary supply increased at a slightly higher rate than expected in June. The Bank of Japan reported today that the country's M2 monetary supply increased 2.3%in June from 2.1% growth registered in May. The BoJ also said the M3 supply increased 0.9% in June. M3 grew 0.7 percent in May.

Meanwhile, lending by Japanese banks, excluding Shinkin banks, rose by 2.0% in June from a year earlier to 393.005 trillion yen, following a 1.6% gain in May. Bank lending has risen for 29 months in a row.

In addition, the Japanese current situation index declined for the third straight month in June, the latest Economy Watchers Survey released by the Cabinet Office showed today. The index stood at 29.5 in June, down from May's 32.1. Meanwhile, the outlook index slid for fourth month in a row to reach 32.1 in June.

The dollar pared the gains it posted in Asian deals against the pound and the euro during early European deals on Tuesday. The dollar slipped to 1.9798 against the pound and 1.5740 against the euro by about 5:05 am ET Tuesday compared to an early high of 1.9712 and 1.5677, respectively. The euro-dollar pair closed trading at 1.5728 and the pound-dollar pair at 1.9765 on Monday.

The Quarterly Economic Survey conducted by the British Chambers of Commerce showed a serious risk of recession in the UK, with some results reaching record low levels in both manufacturing and service sectors

Director General of the British Chambers of Commerce, David Frost said, "These results show a real risk of recession in the coming months. This is obviously deeply worrying, not just for business but for the consumer too, with both manufacturing and services reporting negative results."

The US pending home sales and the wholesale inventories report have been slated for release at 10:00 am ET today.

The U.S. pending home sales is expected to show a 2.5 % drop on-month for May, say economists at Lehman Brothers. Sales unexpectedly jumped 6.3 percent in April, but the bump was considered temporary, says Lehman.

Wholesale inventories, meanwhile, are expected to increase by just 0.4 percent in May, a sharp deceleration from their 1.3 percent gain in April. Inventory-to-sales rations in the wholesale sector remain near historic lows, says Lehman.

The Federal Reserve Chairman Ben Bernanke is set to speak today in Arlington, Virginia at the Federal Deposit Insurance Corporation's Mortgage Lending for Low- and Moderate Income Households forum. Richmond Fed President Jeffrey Lacker is also slated to speak to the National Economists Club in Washington, D.C. on the U.S. economic outlook.