The dollar plummeted to record lows against many of its major world counterparts

USD – The dollar plummeted to record lows against many of its major world counterparts, as traders saw the souring sentiment in the world’s largest economy as justification to jettison the greenback in favor of the other currencies. Friday’s Chicago PMI (44.5 in Feb. vs. 51.5 prior—worst reading in 5 years) and last week’s meteoric rise in Initial Jobless Claims (+373K vs. 349K prior) contributed to the sense of foreboding in the US economic landscape. Moreover, AIG reported a massive $15B write-down on troubled mortgage securities, evidencing the fact that subprime related losses have spread into the more mainstream insurance sector, which in turn revived fears of a sustained credit crunch. The greenback was further pummeled by Chairman Bernanke’s dour testimony last week, intimating that the Fed would continue to lower interest rates (50-bps on 3/18 and another 50-bps at the April meeting), irrespective of the massive inflationary risks building up within the US economy. Bernanke repeatedly stressed the need for “balance”, essentially telegraphing to the markets that the FOMC is far more concerned with stimulating economic growth rather than controlling price pressures. This morning’s ISM Manufacturing reading (48.3 in Feb vs. 50.7 prior) that has fallen into contraction territory suggests that US exporters are not benefiting nearly as much from the weakening dollar as analysts had expected. All eyes will be focused on this week’s headline event—the US NFP release on Friday. Markets are forecasting a tepid increase of 25K jobs; however, if the data disappoints with another negative reading, the dollar could be in for another precipitous decline.

EUR – The euro rose to all time highs above $1.50 last week on signs that the US economy is slipping into recession while growth in the Eurozone remains firm. The euro broke through the psychologically and technically important level, rising to highs at $1.5275 today, after testimony by Fed Chairman Bernanke before Congress that the Fed would act in a timely manner to support growth. In contrast, German IFO—an index of business sentiment—was reported at a stronger-than-expected 104.1, highlighting more favorable economic conditions in the Eurozone. Widening interest rate differentials also helped propel the euro after ECB Governing Council Member Weber stated that expectations for interest rate cuts failed to address the dangers of high inflation. Given the outlook for relatively stronger economic performance in the Eurozone and widening interest rate differentials, the euro is expected to remain supported.

JPY – Investors advanced Japanese bond sales last week on concern of slowing in the world’s second largest economy. Political opposition postponed the appointment of a new central bank governor for the second time in a month. Japan’s factory production fell in Jan. (-2%) at twice the rate anticipated by economists. The yen rose to 160.49 vs. euro last week as traders unwound carry-trade positions after stocks fell. The housing market made a slight recovery falling at the slowest pace in seven months (-5.7% Jan. vs. 19.2% Dec.) from the effects of recent changes in building codes. Expect yen to continue to be dominated by poor data and carry-trade activity.

GBP – The pound opened the week little changed vs. EUR and declined vs. USD to 1.9657 on continued concerns of a UK economic slow-down fueled by a declining housing market. This trend saw a reversal (1.9827 vs. USD) based upon yield expectations as speculation abounds that the UK will cut rates, but at a slower rate than the US (forecast 25-bps cut to 5% by end of June). Housing prices fell at a slower rate (-.03% Jan. vs. 0.5% Dec.) but spiked again to -0.5% in February showing the housing market as the leading detractor to the UK economy. At week’s end, however, saw the pound paring losses against euro to 76.32. Expect sterling to remain volatile as markets digest continued weakness in the global economy at large.

CAD – The loonie dropped to its lowest level in nearly a week on Monday as data showed the economy slowed in the fourth quarter, supporting calls for the biggest BoC rate cut in years. Last week, the currency rose nearly 3% against the greenback, but those gains were almost entirely wiped out in a sudden swoop that was triggered by data that showed a lofty CAD weighed on exports and slowed annualized economic growth in Q4 by more than expected. The data support expectations for the Central Bank to cut its key interest rate by 50-bps to 3.50% tomorrow.

MXN - Mexican Finance Minister Agustin Carstens has just announced a stimulus package to help the country weather a slowdown in the US, which buys 80% of Mexican exports. The plan would protect jobs and make hiring easier, Carstens said today at an event in Mexico City.

CNY – The Chinese yuan has risen moderately despite the overall dollar weakness. The yuan hit a post revaluation high last week at 7.1030, reflecting the PBoC’s commitment to keeping the yuan on pace for moderate gains.

Last Week’s Currency Highs and Lows and Forecast