Foreign Exchange Market Daily Update

The US dollar hit record lows against the euro after European Central Bank President Jean-Claude Trichet said euro zone inflation risks are the highest priority, reducing hopes of an interest rate cut in the near future. On the other hand, the market is expecting the Federal Reserve to cut interest rates by at least 50 basis points at this month's FOMC meeting due to data pointing to a deteriorating economy.

The euro rose to an all-time high against the US dollar after hawkish comments from the European Central Bank as they left rates unchanged at 4.0 percent, as expected. Although record oil prices, higher credit costs, and the euro's 17% gain versus the greenback in the past year has slowed economic growth in the euro region, inflation is running at 3.2%, the fastest pace since the euro's debut in 1999.

The British pound hit the year's high versus the dollar and eased from a record low against the euro after the Bank of England kept its key interest rate at 5.25%. Like the US, however, the UK has begun showing signs of recession with a slowdown in household spending to 0.2%, the weakest in more than a year, and declining consumer confidence.

The Japanese yen extended gains against the US dollar after US pending home sales were unchanged in January, doing little to alleviate investors' worries over the slumping US economy.

The Canadian dollar rose against the greenback as oil and gold prices shot to record highs, supporting the commodity-linked currency, even though economic data showed domestic building permits fell in January.

The Australian and New Zealand dollars rebounded broadly, supported by rising commodity prices and improved appetite for riskier assets and higher-yielding currencies. The Reserve Bank of New Zealand held it key rate at 8.25%, as expected, to combat persistent inflation.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group

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