Foreign Exchange Market Daily Update

The release of a sharply lower report on US factory activity in the Mid-Atlantic region in October this morning continued to add to worries about the state of the US economy. The data forced the US dollar to pare gains against the yen and slip against the euro. Other significant data released today was the initial weekly jobless claims report which showed a decrease and the Consumer Price Index report for September which was unchanged, showing inflation pressures are easing in the US due to a sharp decrease in energy prices. Investors seem to have started to focus more on the US economy and a bit less on the financial crisis.

The euro climbed back against the greenback this morning as European leaders continued to develop their plans to shore up the financial system in the Euro-zone. The single currency also benefited from mixed economic data out of the US that added to concerns about the health of the US economy. However, news that the Swiss government was taking a 10 percent stake in UBS and that Hungary had received an emergency loan from the European Central Bank underlined ongoing financial instability in Europe and should continue to keep the euro under pressure.

Sterling held steady against the US dollar and the euro on Thursday, sustained by an optimistic view of Britain's bank recapitalization action even as recent data demonstrated deepening domestic economic weakness. The perception that the UK is ahead of the curve in dealing with the worst crisis since the 1930s and that it has taken the lead in the delivery of rescue plans by various countries is helping keep the pound off last week's five-year lows.

The Japanese yen declined from near a three- year high against the euro and pared gains versus the dollar on renewed risk appetite in the markets. A drop in money-market rates encouraged investors to resume purchases of higher-yielding assets funded by low-cost loans in Japan. The yen tends to suffer when risk appetite recovers as investors used it to finance positions in higher yielding currencies and assets.

The Canadian dollar was slightly higher versus the US dollar on Thursday morning, rallying back after it dropped to a key technical level during the overnight session. The Canadian dollar, however, is being held back from rising higher with data that showed Canadian manufacturing sales fell nearly four times more than expected in August.

The Australian dollar and New Zealand dollar climbed off its offshore lows on Thursday thanks to a bout of risk appetite, although deepening worries the global economy is heading into recession means that risk aversion will limit the recovery, leading investors to exit these high-yielding currencies.

The Mexican peso dropped 5.42 percent early on Thursday as concerns over the global financial crisis soured investor mood. The United States, Mexico's top trade partner, is already in what could be its longest recession in decades due to the global financial crisis, and with unemployment set to soar, the Federal Reserve will cut interest rates again,

Union Bank of California
The Bank of Tokyo-Mitsubishi Group
http://www.uboc.com

Disclaimer: This market comment is prepared by Union Bank of California's Global FX &amp Derivatives Department for the general information of its customers. It is based of the most accurate information currently available, but should not considered investment advise or a guarantee of future exchange rate or trends.