Greenback Modestly Lower As Stocks Recover

The dollar and yen weakened against other key currencies Tuesday as US equity markets rallied after Monday's sharp stock-market losses. This helped support risk appetite and lessen safe haven demand for the low-yielding currencies. The euro and sterling traded modestly higher before Thursday's European Central Bank and Bank of England interest-rate decisions. Eurozone producer-price inflation fell making it easier for the ECB to cut rates aggressively. Former BOE policy maker Willem Buiter, while saying the BOE will weigh the risk of a possible currency crisis for the pound, expects a 150 basis-point rate cut Thursday. The Canadian dollar declined as crude oil fell to $47.45 a barrel, the lowest settlement since May 20, 2005.

The AUD/USD rose modestly after the Reserve Bank of Australia cut its benchmark interest rate 100 basis points to 4.25% and said the combination of monetary easing, currency depreciation and fiscal expansion represented a 'significant policy stimulus' that would support demand over the year ahead. The Australian dollar is trying to build a base following nearly 35% depreciation since the summer. There is strong support in the 0.60-area as the RBA had intervened at this level and will likely do that again if needed. Strong resistance exists in the 0.70-area.

Financial and Economic News and Comments

US & Canada

• Treasury Secretary Henry Paulson, speaking on the US-China strategic economic dialogue, urged China to boost domestic demand rather than rely on exports to boost the Chinese economy and reiterated his call for a stronger yuan.
• Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed shouldn't favor a single industry. 'Central bank lending policies should avoid straying into the realm of allocating credit across firms or sectors of the economy. The perception that the Federal Reserve is in the business of allocating credit is sure to generate public pressures on the Fed from all sorts of interest groups.' 'We must not overlook central bank independence,' Plosser said.
• The Fed extended the term of three emergency-loan programs to April 30 from January 30.

Europe

• Eurozone producer-price inflation fell 0.8% m/m in October, the largest PPI decline since October 1986 due to a drop in oil prices, following September's downwardly revised 0.3% m/m fall, Eurostat reported. The producer-price inflation rate decelerated to 6.3% y/y from September's 7.9% y/y. The slowing inflation will give the European Central Bank leeway for further interest-rate cuts.
  

• UK construction tumbled to a record low in November, with the CIPS UK construction PMI dropping more than expected to 31.8, the lowest level since recordkeeping began in 1997, following October's 35.1, the Chartered Institute of Purchasing and Supply reported.
• Switzerland's consumer-price inflation rate slowed to a less-than-expected 1.5% y/y in November from October's 2.6% y/y rate, the largest rate deceleration since November 1993, the Federal Statistical Office said. The November CPI fell 0.7% m/m.
  

Asia-Pacific

• The Bank of Japan, at its emergency meeting, maintained its key interest rate at 0.30%. BOJ Governor Masaaki Shirakawa said further BOJ monetary policy easing could hinder the proper functioning of money markets, adding that the BOJ was keeping all options open regarding monetary policy. The BOJ will accept lower-grade corporate bonds as collateral for loans to banks to help businesses get access to funds and will begin accepting the BBB or higher-rated corporate debt on December 9. Shirakawa said the steps should add approximately $32 billion to lending.
• The Reserve Bank of Australia cut its overnight cash rate target 100 basis points, as forecast, to a 6-year low of 4.25%, extending the biggest rate-cut round since the last Australian 1991 recession. 'Weighing up the international and domestic developments of recent months, the Board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting,' RBA Governor Glenn Stevens said in a statement, adding that 'the Australian economy has been more resilient than other advanced economies, but recent data nonetheless indicate that a significant moderation in demand and activity has been occurring.'

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

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