The U.S. dollar hit a record low against the Euro for the second straight day and fell to over a 2 year low against the yen. On Tuesday, the Federal Reserve said the housing slump, tighter credit conditions and high energy costs would likely slow U.S. growth next year to between 1.8 and 2.5 percent, sharply below its 2.5 to 2.75 percent June forecast. Besides market expectations that the Federal Reserve will cut interest rates further, the dollar has been under pressure from growing speculation that Middle East oil exporters, including Saudi Arabia, may revalue their dollar pegs. Risk appetites also began to weaken on Tuesday after major U.S. mortgage finance company Freddie Mac reported a record loss, prompting fears it would be unable to provide liquidity to an already struggling home loan market. Look for continued the dollar to remain under pressure.
The Euro reached yet another record high against the greenback this morning. According to Finance Minister Peer Steinbrueck, the German economy has coped well with exchange rate movements in recent years and also noted he couldn’t describe an objective pain threshold. Comments like these send supportive signals to the market to continue pushing the Euro higher.
The Sterling weakened to the lowest level since 2003 against the Euro and fell versus the greenback on speculation the Bank of England may start cutting borrowing costs from 5.75 percent as soon as next month. Recent signs of slowing in Britain’s housing market and a dovish BoE inflation report last week support the notion that the combination of a slowing economy and credit concerns are prompting an imminent rate cut for December.
The Japanese yen rose to its highest level against the dollar in more than two years as fears about further credit market losses and the health of the U.S. economy led investors to reduce exposure to risk. The low-yielding Japanese currency tends to do well in times of risk aversion because investors unwind carry trades that use cheaply-borrowed yen to buy higher-yield currencies. Look for continued volatility in the yen as risk appetite in the market continues to fluctuate.
The Canadian dollar fell to an 11 week low as the nation's September retail sales unexpectedly declined and amid concern that global economic growth will slow. The softer-than-expected retail sales data increased the possibility of an early Bank of Canada interest rate cut.
The Australian and New Zealand dollar weakened overnight, with the Aussie dropping 2 percent against the greenback. Most notably, Australia’s dollar declined 3.3 percent against the yen, extending this month's decline to 12 percent. New Zealand's dollar also weakened 2.4 percent against the yen as investors exited higher-yielding assets funded by loans in Japan.
