Foreign Exchange Market Daily Update

The US dollar gained against a basket of currencies after a government report showed that the annualized trade deficit shrank for the first time in six years. The US trade deficit narrowed 6.9 % from November to December to $58.8 billion.

Steady economic growth and a weakening dollar drove US exports and imports to new records. Economists estimate that ½ percentage of US economic growth in 2007 was due in part by net exports. Business inventories data came in at 0.6 %, above forecasts of 0.4 % while first-time US jobless claims benefits declined by 9,000 to 348,000 last week. Investors await a speech before the Senate Banking Committee on the health of the US economy by Federal Reserve Chairman Ben Bernanke. With the dollar under pressure amidst recent turmoil in the housing market and the credit crunch, a surprising decline in jobless claims and increased retail sales data in January, eased some fears of the US falling into recession.

Overnight, the US dollar initially weakened against the Euro, but regained some losses as business inventories data and U.S. jobless claims came in stronger than expected. A report showed that the Euro zone growth halved in the fourth quarter to 0.4 % down from 0.8 % in the third quarter, even though the two biggest Euro Zone blocs, Germany and France, had a quarterly increase of 0.3 %. When considering overall year over year terms, the Euro Zone grew by 2.7 % in 2007, down from 2.8 % in 2006. Despite the ECB's hawkish talk earlier this month, Euro Zone growth is expected to fall by half in the fourth quarter and decline 0.1 % year over year, pointing to an economic slowdown and emitting a loud clarion call for the ECB to cut rates.

The Sterling remained steady against the dollar as investors continued to buy Sterling following Wednesday's Bank of England inflation report. The inflation report by the Monetary Policy Committee pointed to modest interest rate cuts by the BoE. However, the tides may change after Bernanke's speech later today.

The Japanese Yen weakened against the dollar. Although many feared the US falling into recession in the wake of the housing turmoil and credit crunch, surprising US economic data piqued investors' appetite for risk with rekindled carry trade appetite.

The Canadian dollar weakened against the US dollar after data reflected Canada's trade surplus weakened to its lowest point in nine years in December. The December surplus came in at 2.35 billion Canadian dollars, which was well below the 3.4 billion Canadian dollar market forecast.

The Australian and New Zealand dollar rallied against the US dollar. After Australia added 26,800 new jobs in January beating the forecasted 15,000 rise, the jobless rate fell to 4.1 %, which is its lowest in more than 33 years. The kiwi strengthened against the greenback tailing gains in the Aussie dollar.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group

Posted in: Forex