Dollar shatters the key trend line resistance at 118.15-20 to hit a 2 week high at 118.50 after a mixed showing in the March Tankan business sentiment survey. The diffusion index for large manufacturers fell to 20 in Q1 from 21 in Q4, the first decline in four quarters and undershooting expectations of a 23 reading. But this was partly offset by the rise in diffusion index for large non-manufacturers to 18 from 17 and by the positive forecast for Q2 large manufacturers expected to recover to 22. The capital expenditure for all-industries rose to 10.6% the year to March 2006, beating the 9.1% forecast from the December survey. Chief Cabinet Secretary Shinzo Abe said “The recovery trend will continue based on future economic improvements” but reiterated the government mantra that slight deflation persists.


The mixed tankan survey comes one day after Japan’s nationwide CPI posted the fourth consecutive monthly increase in February, supporting the notion that deflation has been beaten. But PM Koizumi stated he cannot say whether the end of deflation can be declared at the end of the first half of the new FY in September.


The main source of downward dollar pressure for the week could emerge from the Washington amid pronouncements about the future of US Treasury John Snow and further posturing with China in the currency front, especially in light of next week’s visit by Pres Hu Jintao to the US