The euro tested $1.50 last week

USD – The dollar remains under pressure as market participants return from last week’s Thanksgiving holiday. Holiday thinned trading conditions provided little relief for the ailing greenback as continuing subprime worries weighed on the market. News that mortgage giant Fannie Mae reported larger-than-expected losses unnerved markets wary that US subprime woes were spreading to other segments of the real estate market. Also citing the housing slump along with tighter credit conditions and rising energy costs, the Fed revised downward its US 2008 growth outlook to 1.8-2.5%. The Fed had projected 2.5-2.75% last June. With the US currency reaching a fresh new low vs. the euro and a 2-year low vs. the yen, the trend toward continued dollar weakness appears intact.

EUR – The euro tested $1.50 last week, rising to $1.4966 amid holiday trading conditions. The single currency marked fresh all time highs on several days on the run up to $1.50 after beginning the week at the low 1.46 level. The euro’s gains were achieved amid a mixed chorus of comments from European authorities. French Public Accounts Minister Eric Woerth reiterated President Sarkozy’s comments that the euro was too high and was bearing a disproportionate burden of global imbalances, notably China’s fixed exchange rate vs. the dollar. By contrast, German Finance Minister Peer Steinbrueck said that Germany is coping well with the strong euro and could not identify an objective pain threshold. After being repelled on the first test $1.50, a retest of this psychologically important threshold appears all but inevitable.

JPY – The Japanese yen opened the week down against all 16 major currencies (last close 109.76) as Asian stocks pared earlier losses and sparked the carry-trade once more in what has become a fairly reliable cycle. Traders sold borrowed yen and bought high yielding & riskier assets with South African rand & Kiwi dollars the winners. The pair was followed by a sell-off in Japanese stocks as market fears over continued sub-prime losses reared their ugly heads once more. The yen rallied & retreated as well against the dollar last week based upon speculation over the release of the minutes from the Fed’s Oct. 31 meeting & release of quarterly economic forecasts due today. Expect continued volatility as traders attempt to decipher the dominant trends.

GBP – The UK currency advanced against 11 of the basket of 16 most actively traded currencies. The paring of Asian stocks and the reigniting of carry-trade investment sent the pound as high as 2.0633 in last week’s trading. Northern Rock, the first of the UK banks to disclose troubles over sub-prime losses, is being bid for ownership by two investors who have promised an infusion of cash to the tune of 1 billion GBP ($2.07 billion). Traders, however, have doubts about interest rates in the long term as evidenced by two-year bonds poised to snap the longest rally since 1992. Growth cuts in the outlook for the US economy bolstered gains in the 2-year notes while driving their yields to the lowest since March of last year. Expect a relatively stable pound ahead of Fed.

CAD – The juggernaut loonie retreated from all-time highs last week but remains the nemesis of the greenback with strong data. Canadian Whole Sale numbers for September unexpectedly advanced 1.1% (C$43.7 billion) recouping more than half of Augusts losses. This suggests a buoyant economy even in the face of an expensive currency and slow downs in US demand for Canadian goods. However, with Canadian growth still under threat from current conditions, the outlook for a possible interest rate cut to avoid an economic stall has kept the Canadian currency at bay from the record high of .9206 set back on November 6th.

MXN – Last week the Mexican Peso saw its most dramatic retracements since September. Peso is just the latest victim followed by the Brazilian real and others as global credit concerns stem demand for emerging market assets & investments. Peso denominated bond yields rose across the board and prices dropped as investors shied away from Mexican paper. Inflation concerns for Mexico also curbed bond purchases. Floods and harsh weather in the southern state of Tabasco this month will likely push-up consumer prices due to agricultural losses.

CNY – The Chinese yuan is in the spotlight as European officials have been ratcheting-up pressure to allow the currency to appreciate in an effort to relieve pressure on the euro. CNY largely shrugged off the comments rising 0.5% last week to 7.3950 but has risen 9.6% vs. the dollar since July 2005 when it was decoupled from a dollar peg.

Last Week’s Currency Highs and Lows and Forecast

U.S. Economic Indicators