Foreign Exchange Market Daily Update
The US dollar fell against its counterparts as global equities pushed higher overnight. In other news Citigroup, which lost half its market value this week is considering selling part of its company or in talks to potentially merge with another firm. On the unemployment front, President Bush announced new legislation today to extend unemployment insurance benefits nationwide. The announcement comes after yesterday's jobless benefits release showed a rise to 542,000.
With investors moving into riskier higher yielding assets overnight, look for the dollar to remain closer to the weaker end of its range.
The euro rose against both the dollar and yen despite the fact that data released showing that the European service and manufacturing sectors contracted in November. The flash purchasing managers' indices fell to 43.3 to a record low and below expectations for a reading of 45.2. The news could increase the pace at which the European Central Bank (ECB) will cut interest rates as there is a growing consensus that the ECB may cut rates by as much as 75 basis points at its next meeting on December 4.
The British pound strengthened across the board after European stock markets rose. Minutes released from the Bank of England stated that at its last policy meeting there was some talk of an even more aggressive rate cut by over 150 basis points. Look for the pound's rally to remain short lived as the market expects further rate cuts form the Bank of England this year with a 100 basis point cut as early as December.
The Japanese yen weakened across the board as investors used a rebound in stock prices overnight as a sign to invest in riskier currencies. In other news as expected The Bank of Japan decided to keep rates on hold at 0.3 percent. Japanese Finance Minister Shoichi Nakagawa stated that they must be ready to deal with large market movements as a reminder that Japan will use currency intervention to stem the yen's rise.
The Canadian dollar held its ground despite oil dropping as low as $48 a barrel. In other news Canada's CPI data for October released showing a drop to 0.5 percent as expected. Look for the loonie to try and test the 1.30 level as commodity prices continue to be pressured.
The Australian and New Zealand dollars rose close to two percent after loosing ground yesterday with the Aussie losing three cents. The sharp move prompted the Reserve Bank of Australia to intervene to stem the currency loss. With the prospect of a prolonged global recession, markets are now starting to price in even more aggressive rate cuts by both reserve banks. Look for both currencies to hold on to today's gains on the back of stable Asian equities.
The Mexican peso weakened breaking the key psychological level of 14 pesos per dollar as fears over major U.S. auto makers failing, coupled with the new concerns over Citibank continued to drive the currency lower. Look for the peso to remain under pressure as the reality of a US recession weighs on the single currency.
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 & 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.
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