Pressure on the dollar is expected to continue this week

USD – Pressure on the dollar is expected to continue this week as many of last week’s themes—equity market losses, subprime worries and risk aversion—hang over the dollar. Last week’s economic reports provided little support to the dollar. October Producer Prices came in at a benign 0.1% from the previous month. Industrial output fell -0.5 % in October. The ailing stock market also provided little lift to the dollar, suffering from the overhang of subprime worries, and concerns over more undisclosed losses from major financial institutions. The USD is also facing pressure from its diminishing global status: Saudi Arabia and several other Gulf countries have announced that they are considering revaluing the peg to the dollar; China again reiterated its concerns over the effect of dollar weakness on its reserves, which are denominated primarily in USD. Amidst this backdrop, the greenback will likely continue to be pressured, particularly as thin trading conditions prevail ahead of the US holiday-shortened week.

EUR – Euro strength is expected to continue this week, buoyed by strong Eurozone economic conditions. The single currency maintained its strong tone trading in its upper ranges between $1.4600 and all-time highs at $1.4752. Commenting on the euro last week, German Deputy Finance Minister Thomas Mirow said that the German economy has coped well with the strong euro and that it has not significantly hindered economic growth.

JPY – The yen rode a bit of a roller coaster last week having been whipsawed between a weak economic outlook and investors rolling out of “carry-trades”. BoJ governor Fukui once again reiterated the fact that there is little inflationary or spending data on the horizon to indicate a need for intervention—a common move in the past to control an appreciating yen. He also stated that there is, “no predetermined time frame for raising interest rates.” Analysts are predicting consumer prices will remain flat in the near-term, but will likely rise in the long-term. While last week saw the largest drop in the yen vs. the euro in eight weeks, it also witnessed the Nikkei snap-up over 200 points—the largest intra-day gain in over two months. The yen will likely continue to ebb-and-flow with the tide of investments for the balance of this week.

GBP – The British pound began last week with a rebound off of the two- week low close from the prior week. Bank of Ireland Chief Brian Goggin led what has become an about-face of late from major banks: “Difficulties in the credit markets will not likely ease until at least mid-2008.” This is change from the prognosis in September that they would ease rates going into the first part of ’08. It was only two short months ago that Northern Rock Bank, the 5th largest in the UK, experienced what amounted to a two-day run on the bank, prompting intervention by the BoE to provide it with liquidity. The UK currency saw its biggest drop against the euro in 4-½ years last week on speculation that the BoE will cut rates as early as December. Expect the pound to remain under pressure against the EUR for the balance of this year.

CAD – The Canadian dollar continued its fall off its all-time high of 0.9205 against the USD following the last Fed rate cut on November 5th. In fact, it was the largest rate of decline the loonie has seen since 1971. These declines were on the heels of falling Canadian commodity exports (i.e., gold & oil). It seems that even the Canadian juggernaut is not immune to the current risk aversion attitude in the markets, fueled by the estimated $400 billion dollars in sub-prime related losses worldwide. The BoC bought 1.57 billion in securities in a one-day purchase to infuse cash into the banking system in a move to keep overnight rates near target levels and lower lending rates.

MXN – The peso opened last week with its biggest losses against the USD since late September, followed by a nearly 1% retracement the next day, while finally rounding-out the week by surrendering nearly all its gains. This, of course, has been par for the course across the currency markets, as investors continue to diversify out of risk-laden investments. Surprisingly, the Mexican government only exchanged a 100 million in USD-denominated bonds it had planned to swap for peso securities in an attempt to curb diversification out of higher yielding peso assets. Mexico, being the US’s second largest trading partner, will likely see continued fallout as a result of the US-led global sub-prime collapse.

CNY – The Chinese yuan is steady holding above ranges at 7.42. Chinese authorities have been voicing concerns over dollar weakness and the ensuing effect on its foreign reserves. Domestically, Central Bank Governor Zhou Xiaochuan downplayed any near-term rate hikes after consumer inflation rose to 11- year highs at 6.5% in October. China has raised rates 5 times this year.

Last Week’s Currency Highs and Lows and Forecast

U.S. Economic Indicators