America's currency continued its precipitous decline throughout last week

USD – America’s currency continued its precipitous decline throughout last week, setting fresh new record lows vis-à-vis some of its major world counterparts, namely the EUR and the CAD. With the economic landscape of the US still mired in despondent gloom, recoiling from the blowup in the US subprime mortgage sector—all amidst a loosening monetary policy environment—traders as of late have had very little appetite for the greenback. Last week’s sanguine US Trade Balance (-$56.5B in Sep. vs. -$58.5B exp.) did little to buoy the USD, as the ostensible gravitational pull downward by souring dollar sentiment was confirmed by last Friday’s University of Michigan Consumer Sentiment Index (75.0 in Nov. vs. 80.0 exp.—the lowest level in nearly a year). Markets will turn to key inflation data this week in order to garner additional insight with respect to the Fed’s stance on monetary policy ahead of the next FOMC meeting on 12/11. With the world’s largest economy currently facing a most undesirable phenomenon known as “stagflation”—stagnating economic growth coupled with rising inflation—Team Bernanke will have its work cut out for itself as the all-consuming thought preoccupying the market’s mind remains: “To cut (interest rates) or not to cut (interest rates)? That is the question.”

EUR – The euro began the week keeping its strong tone after last week’s run to fresh all time highs vs. the dollar. The euro climbed to peaks at $1.4752 as continuing subprime worries in the US sent stock markets plummeting and investors bailing out of dollars. The euro’s nearly unstoppable rise prompted a rash of comments from European officials looking to slow the pace of the currency’s appreciation. ECB President Jean Claude Trichet commented that “brutal” exchange rates were not good for the world economy, rehashing his rhetoric from January 2004 to slow the-then-rise above $1.30. Counteracting the verbal intervention, however, the ECB held rates steady at 4.00% and paved the way for a near-term rate hike by stating that the Central Bank remained vigilant against inflationary pressures. Further verbal intervention appears likely to increase as the euro approaches $1.50.

JPY – Former BoJ policy maker Kazuo Ueda weighed in with what the markets have suspected for some time now—that the Japanese economy faces increasing risks of slowing in the coming months due to the US housing recession. This was consistent with the Central Bank cutting its inflationary forecast for ’08 on Oct. 31st. The Nikkei also saw its lowest close in seven weeks last Tuesday on record high fuel prices only to do an about-face the following day on word that Goldman Sachs would not announce a sub-prime loss write-down. Friday rounded out the see-saw paced week with 10-year bond yields falling to 8-week lows after Fed Chairman Bernanke announced that the US economy will experience marked slowing in the year to come.

GBP – The British pound opened last week with the weight of a 26-year high (2.1161) to round out eight of nine days of gains against the dollar. The euro was not immune either trading at 69.58 against the UK currency. That accession seen by the pound was in sharp contrast to the slowest pace of growth in 11 months (1%) for retail sales. This could create challenges for retailers coming into the busy holiday season and could persist until the BoE decides to reduce rates, which have been at 5.75% since July of this year. Data last week also offered additional rate focus with UK Consumer Confidence disappointing with the lowest reading of the year. Markets are now focused on when the BoE will decide to assist UK consumers who are straddling nearly 1.4 trillion pounds ($2.9 trillion) in debt.

CAD – The currency rallied overnight against the greenback as investors warily resumed risky carry trades, partially due to Japanese Prime Minister Fukuda’s comments on the strong yen. CAD is not a high-yielder, with the overnight rate at 4.50%, but it often gets lumped with carry trade currencies, which like the loonie are often commodity driven. Expect the currency to continue to ratchet up this week.

MXN – Mexico's congress approved the country's third consecutive balanced budget last night. The lower house voted 449 to 6 to approve President Calderon's 2008 budget plan, allowing for 2.6 trillion pesos ($235.7 billion) in spending and assuming the country's oil exports will sell for $49 a barrel. The spending approved matches the revenue amount passed by the lower house Oct. 18.

CNY – Comments from China that it may diversify its massive dollar reserves fueled dollar weakness last week. Chang Siwei, Vice Chairman of the National Peoples Congress rattled markets by commenting that China may reallocate its reserves into other currencies. Yuan appreciation has been steady rising 0.6% to 7.4054 vs. the dollar.

Last Week’s Currency Highs and Lows and Forecast

U.S. Economic Indicators