With today’s data release reflecting a sharply narrowing trade deficit, the US dollar is gaining some ground against the major currencies today. The USD was able to extend gains against the euro and yen once the news showed that the trade deficit narrowed to $40.44 billion, from a revised $56.69 billion in October and below economist’s expectations of $51.30 billion for November, the largest contraction in 12 years. Federal Reserve Chairman Ben Bernanke said in a speech in London that the global economy had been hit hard by the ongoing financial crisis and that government responses would determine the timing and strength of any recovery, his comments had little impact on markets. Markets are extremely risk adverse at this time and the USD is garnering strength from that sentiment.

The euro fell to one-month lows as an aversion to riskier assets continued to dent sentiment towards the single currency ahead of Thursday’s ECB meeting.
Analysts are anticipating a 50bp interest rate cut, though the ECB will still be largely viewed by Investors as being “behind the curve” in managing the euro’s deepening recession. Though Standard & Poor did not come through with downgrading the ratings of several euro-zone countries, the threat is still ongoing and sending investors to the less risky USD.

The British pound remained under pressure as analysts said the bleak UK economic outlook continues to pound the currency. Sterling fell to its lowest level against Japanese yen since April 1995 on Tuesday, extending earlier losses as investor’s unwound exposure to riskier positions.

Benefiting from the extreme aversion to risk in markets right now, the Japanese yen continues to gain strength, nearing multi-month highs against both the higher yielding euro and pound.

Hitting one-month lows against the USD today, the Canadian dollar is being burdened by weaker commodity prices and data that showed the country's trade surplus narrowed more than expected. Canada’s trade surplus narrowed more than expected in November to C$1.28 billion, its lowest since October 1997, due to plummeting oil prices and the resulting slide in exports.

Escalating risk aversion weighed heavily on higher-yielding currencies like the Australian and New Zealand dollar, driving them to 4-week lows against the USD and yen. The Aussie rose against the kiwi, after rating agency Standard and Poor's warned New Zealand's foreign currency debt rating could be downgraded if its current account deficit continued to grow. Economists see a New Zealand recession extending well into this year, requiring more interest rate cuts to prop up the economy. Rates are currently at a 5 year low. The next rate review is on Jan. 29.