The US dollar held its ground against the euro, but weakened against the yen due to risk aversion as concern over a deepening global credit crisis weighed on investors. The US currency also remained under pressure as Treasury Secretary, Henry Paulson announced the importance of considering capital needs of non-bank financial institutions and stated that mortgage asset purchases are not the most effective way to use the 700 billion allocated from the Troubled Assets Relief Program.
Look for the dollar to continue to benefit from safe haven flows ahead of a slew of data due out tomorrow and Friday including jobless claims, trade balance, retail sales and consumer sentiment.
The euro fell against the dollar in early European trading, but managed to trim its losses due to profit taking. While the yen managed to hit a two-week high against the euro as the Nikkei fell overnight.
The British pound tumbled to a six-year low against the dollar and a record low versus the euro after the Bank of England's inflation report showed a dwindling UK economy. The Bank of England’s report showed CPI inflation just below 1 percent in two years, compared to the current 5.2 percent level. The news clears the way for further easing from the Bank of England by as much as another 100 basis points by March 2009.
The Japanese yen strengthened against its US counterpart after gaining ground in the two previous trading sessions. Japan’s currency continues to benefit due to safe haven flows despite a 25 year low in consumer confidence and a pressured equity market. There is also growing concern that Japan’s $20 billion stimulus plan will not be enough to boost consumer spending and support the economy. With risk aversion at the forefront of investors minds, look for the yen to remain well supported.
The Canadian dollar weakened against the greenback as oil prices fell to 20 month lows touching $57 a barrel. With little economic data due out in Canada this week, look for Canada’s currency to remain under pressure as growing concern over the deep economic crisis continues.
The Australian and New Zealand dollars fell against their US counterpart, but remained above two-week lows against the dollar and the yen as commodity prices continued to slide, while investors paired back carry trades. Australia’s central bank cut its overnight rate by 75 basis points to 5.25 percent last week, after a 100 basis point cut last month. Look for both the Aussie and Kiwi to remain under pressure as markets are starting to price in another 100 basis point cut next month from the Reserve Bank of Australia.
The Mexican peso weakened as investors focused on the prospect of a prolonged global recession. Look for the peso to continue to be pressured as Mexico remains concerned over its US and European trading partners.
