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Daily U.S. Forex Summary

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The U.S. dollar was hurt by news of further U.S. credit market losses this morning

Mon, Jan 14 2008, 05:59 GMT
by Union Bank of California Team

Union Bank of California

The U.S. dollar was hurt by news of further U.S. credit market losses this morning. Merrill Lynch & Co. is expected to write down $15 billion from mortgage-related losses next week. The amount exceeds the $12 billion write down analysts were expecting. At the meantime, Bank of America said it would buy struggling mortgage lender Countrywide Financial Corp. The buyout news eased some fears of the U.S. subprime turmoil. However, it is still uncertain how much banks lost on subprime mortgages. UBS today warned that 2008 was likely to be another “difficult year”. News that the U.S. trade deficit widened to the highest level in 14 months in November, due to higher oil prices, also hurt the greenback this morning.

The U.S. dollar tumbled yesterday after Fed Chairman Ben Bernanke said the central bank was ready to take “substantive additional action” to boost the fragile U.S. economy. Bernanke’s comment confirms market’s view that a 50 bps rate cut could happen on January 30, taking the Fed funds rate to 3.75 percent, eroding its dollar yield advantage against the euro. The euro rose to a day’s high of $1.4817 before trading steady at 1.4787.

The British pound sterling dipped below $1.95 after sluggish U.K. industrial output data in November before trading steady at 1.9590. The market expects further rate cuts in the U.K. as its economy continues to report sluggish data. Expect the pound sterling to soften further as rate cuts will diminish its high yield appeal.

The Japanese yen strengthened as investors shy away from risk on fears of more losses from the credit market turmoil. Risk reduction is expected in the months ahead amid a slowing global economy, which should encourage yen gains as investors unwind carry trades.

The Australian dollar held gains on expectation that U.S. rates will be slashed aggressively to rescue the U.S. economy from a recession. In contrast, recent strong Australian data are providing support for the Reserve Bank of Australia to hike rates in the near-term, widening the Aussie’s rate advantage.

The New Zealand dollar also benefited from Federal Reserve Chairman Ben Bernanke comments yesterday signaling deeper U.S. rate cuts. At the moment, interest rates are expected to remain unchanged in New Zealand.

The Canadian dollar crippled further to its lowest level in a month on news that Canada’s economy lost 18,700 jobs in December, more than the additional 15,000 jobs expected to be created. Bank of Canada is expected to cut rates again on January 22.

Published on  Mon, Jan 14 2008, 06:02 GMT