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Foreign Exchange Market Daily Update

Forex Fundamental Analysis Reports | Written by Union Bank of California | Nov 30 07 15:45 GMT |

Foreign Exchange Market Daily Update Continuing to trade in a narrow range ahead of the weekend, the U.S. dollar dipped against the euro, while the yen weakened broadly after Federal Reserve Chairman Ben Bernanke hinted that the Fed may have to cut interest rates to help the economy weather turmoil in financial markets. His comments cemented expectations of easier monetary policy, which may help the U.S. economy to avoid a recession. In remarks to the Charlotte Chamber of Commerce late yesterday, Bernanke said a resurgence in financial market strains had dimmed the outlook for the U.S. economy. Combined with comments earlier this week from Fed Vice Chairman Donald Kohn, who said renewed financial market turmoil could slow the U.S. economy more abruptly than thought, suggesting the central bank is ready to cut rates if necessary at a Dec. 11 policy meeting. Some market watchers are even anticipating a 50 basis point cut. A separate report released today showed tame underlying U.S. inflation pressures in October also strengthened the case for more rate cuts. Euro zone inflation jumped to its highest in six and a half years in November and inflation expectations rose, but economic growth was set to slow, highlighting the European Central Bank's rate dilemma. The European Union's statistics office estimated that consumer prices in the 13 countries using the euro rose 3.0% year-on-year. The ECB, which meets on interest rates next Thursday, wants to keep inflation just below 2% over the medium term but has been in a wait-and-see mode since September to assess the full impact of the global credit crunch on the economy. Economists said the credit squeeze also showed in the European Commission's monthly sentiment survey for November which showed another decline in confidence, led by consumers and the services sector. Household consumption is likely to slow. Retail sales in Germany confirmed that consumers were becoming more gloomy by falling by a much deeper than expected 3.3% in October against September. The British pound strengthened versus the dollar and euro on Friday, as investors pared back bets that the Bank of England will cut interest rates next week. Analysts said that investors were reining in expectations of monetary easing after digesting comments from the more hawkish members of the Monetary Policy Committee of the Bank of England who appeared before the Treasury Select Committee yesterday. The Japanese yen remains under pressure, with global stock prices strengthening on the view that more Fed easing could keep the U.S. economy out of recession, investors were eager to wade back into risky carry trades that use cheaply borrowed yen to buy higher-yielding currencies and assets. Despite recent losses, the yen is still up about 4% against the dollar this month on fears that credit market turmoil would push the U.S. economy into recession and slow global growth. The Canadian dollar was slightly firmer against the U.S. dollar on Friday, but investors held off making any big moves ahead of data on Canadian third-quarter economic growth. A string of weak economic data has amplified concerns about the effects of the strong currency and the U.S. economic slowdown on the country's struggling manufacturing sector. Analysts are uncertain of the BoC will cut rates at next Thursday’s meeting or hold off until next month. Lower interest rates would generally make the currency, which has surged around 60 percent since 2002, less attractive to investors. The prospect of interest rate cuts in the U.S. eased concerns about a slowdown in global growth, boosting the high-yielding currencies of Australia and New Zealand. Though both currencies are near 2-months lows their fall has been sidelined for now. 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.