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Daily U.S. Forex Summary

The U.S. dollar front this morning ahead of the Veteran's Day holiday weekend

Mon, Nov 12 2007, 05:54 GMT
by Union Bank of California Team

Union Bank of California  |  View company's profile

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There is mixed news on the U.S. dollar front this morning ahead of the Veteran’s Day holiday weekend. Initially, the dollar was slightly stronger against the euro after trade data showed that the U.S. trade deficit unexpectedly narrowed in September on strong export growth, largely due to dollar weakness. Surprisingly it opened at 1-1/2 year lows against the yen, as investors sold the U.S. currency in favor of safe haven assets in the wake of concerns about the health of the financial sector and expectations of U.S. rate cuts. Yesterday’s downbeat economic forecast from Federal Reserve Chairman Ben Bernanke, cemented market views that the Fed will cut rates more, further eroding the greenback's yield appeal. Bernanke told U.S. lawmakers that the Fed expected economic growth to slow noticeably in the fourth quarter of 2007 and the first half of 2008, citing credit industry turmoil and the likelihood that the housing sector slump deepens. Rate cut worries in the US are giving the market reason to sell dollars ahead of the weekend.

Yesterday’s comments from Fed Chairman Bernanke, basically solidifying the likelihood of a 25 basis point cut before year end, helped to drive the euro to fresh all time highs this morning. Bernanke’s comments are in sharp contrast with ECB President Jean-Claude Trichet's vow to keep a grip on inflation, leaving a chance that the ECB may raise interest rates further from current 4%. Ministers from the 13 countries using the euro will meet on Monday with European Central Bank President Jean-Claude Trichet and Economic and Monetary Affairs Commissioner Joaquin Almunia to discuss market turmoil and economic prospects. Euro zone finance ministers are likely to put a brave face on the euro's surge against the dollar, wary that currency markets would probably ignore any call to reverse the trend.

The British pound dipped from 26-year highs against the USD following the release of data showing UK goods trade deficit with the rest of the world widened more than expected. The Office of National Statistics said that the goods trade gap rose to 7.754 billion pounds in September from 6.948 billion pounds in August representing the widest deficit since records began in 1697.

The Japanese yen broke out of its recent ranges against the USD today, soaring to 1 ½ year highs against the USD as investors dump risky assets. Given the dollar’s ongoing weakness against the European currencies, current yen levels are more in line with the weakening USD.

Fears of wider credit-related losses at U.S. financial institutions saw investors exiting risky investments in AUD and NZD and anticipating more Federal Reserve rate cuts.

As we see a consolidation across the board today of commodity based currencies that have been moving higher at an unchecked pace, the Canadian dollar is off nearly 2% against the USD. The loonie has been trading near all time highs against the USD, but a sharp pullback in oil prices as well as risk adverse investors ruling the market has led the turnaround. The CAD should remain well supported in the next months, especially if the likelihood of another rate cut in the US increases.

The Australian dollar retreated from near 24-year peaks as investors dumped high-yielding currencies amid a fresh bout of risk aversion. Even after the Reserve Bank of Australia raised rates by 25 basis points to an 11-year high of 6.75 percent and left the door open for more tightening, investors are moving away from the currency. The AUD has risen nearly 16% this year, buoyed by firm commodity and gold prices. The underlying fundamentals for the Australian economy remain strong and that should support the Aussie in the long term.

The Australian and New Zealand dollars fell by nearly 2% versus the greenback as investors, rattled by concerns about the health of the financial sector, exited carry trades where they borrow low yielding currencies like the yen to fund purchases of higher yielding assets.

Mexican stocks fell sharply today and the Mexican peso weakened after continued credit market losses by large U.S. banks, fanned worries about the health of the U.S. economy.

Published on  Mon, Nov 12 2007, 05:56 GMT

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