The US dollar strengthened to a fresh three-week high against the euro, following a flash estimate of euro zone inflation data that came in weaker than expected, increasing pressure on the European Central Bank to cut interest rates. Analysts confirm that the prospect of an ECB rate cut at the bank's next interest rate meeting on Jan. 15 is putting pressure on the single currency.
The falling euro prompted broad dollar gains, with the U.S. currency climbing above 94 yen against the Japanese yen to its highest level since the start of December, while the dollar index hit its highest in three weeks.
Markets had little reaction to data showing auto sales fell 36% in December to close out the weakest year since 1992 in the world's biggest car market.
US factory orders are also expected to move lower as the recession deepens.
The euro continued its sharp decline against the USD and GBP, as news of record lows in manufacturing activity in the euro zone was released for December 2008. The Eurozone PMI, reflecting contracting activity for the seventh month, settled to an unseen low. This data may mount pressure on the ECB to cut interest rates significantly at its upcoming meeting.
Analysts believe the news from Europe is so poor that market perception is that the ECB is behind the curve on interest rates, driving the recent weakness.
The current expectation is for the ECB will cut its key lending rate by 50 basis points or more at its policy meeting next week, leaving the door open for additional cuts in the future.
The British pound climbed to fresh 3-week highs against the euro as the single currency is besieged by rate cut expectations.
It was unable to make any gains against the USD as dismal housing and consumer confidence data underlined the UK's economic vulnerability.
With British house prices falling another 2.5% in December, making 2008 the worst performing year on record.
The BOE’s Monetary Policy Committee is expected to ease borrowing costs by at least 50 basis points to a historic low when they meet on Thursday.
The Japanese yen fell to 1-month lows against the dollar on today’s broad dollar rally.
As oil and gas goes, so goes the Canadian dollar, surging on today’s news that oil production will be cut and oil prices soared 5%. As Israel's ground and air assault on Gaza raised Mideast tensions and a dispute over natural gas between Russia and Ukraine fanned supply fears, oil prices have climbed and the CAD remains at multi-week highs.
Both the Australian dollar and the New Zealand dollar remain stabile at their higher ranges against the USD supported by hopes that fresh stimulus plans from the United States and Germany would help the global economy recover.
Higher commodity prices and high interest rate yield keep the currencies well supported.
