Foreign Exchange Market Daily Update

The US dollar plunged across the board hitting a new all-time low against the euro and below 100 yen for the first time since 1995 as US retail sales fell unexpectedly last month, adding to the concerns that the United States has entered a recession. In other news this morning, a Carlyle Group fund moved closer to collapse, adding to turmoil in financial markets. The dollar approached parity with the Swiss Franc and slumped versus the British pound after Carlyle said lenders will take over assets of its mortgage-bond fund. Carlyle Capital Corp defaulted on $16.6 billion of debt keeping markets expecting more Fed interest rate cuts. The Fed's attempt at boosting liquidity at the beginning of the week was not enough to restore the confidence in investors and risk aversion will continue as US dollar sentiment continues to deteriorate rapidly ahead of March 18th's FOMC meeting.

The euro soared to unchartered territory against the US dollar as credit market stress reared its ugly head again. European Central Bank President Jean-Claude Trichet reiterated in an interview published today that “disorderly movements in exchange rates are undesirable from the point of view of economic growth.” Despite the ECB President's concern over the recent excessive exchange rate movements, particularly against the US dollar, the EUR has strengthened 7% versus the US dollar this year, building on the 12% gains in 2007.

Sterling rocketed versus the weakening US dollar, taking advantage of the growing sense in financial markets that the Federal Reserve's recent actions to ease credit market strains will not work. England offers the highest interest rates in the G7 nations, which benefits the British pound, due to a widening yield advantage. The Bank of England is not going to cut interest rates any time soon as inflation is likely to rise in the near term.

The Japanese yen shot to the highest in a decade versus the US dollar following poor US economic data and renewed liquidity woes. The yen also gained as investors exited so-called carry trades, in which they borrow in a country with low interest rates and buy higher-yielding assets elsewhere, earning the spread between the two. The risk is that currency moves erase those profits. So far in 2008, the yen has strengthened almost 10% against the US dollar and the Nikkei 225 index has fallen nearly 20%.

The Canadian dollar gained against the greenback supported by record oil and gold prices once again, but has not broken out of the recent range. Canada has strong economic ties with the United States, where it sends the bulk of its exports, so the health of the US economy may eventually start to weigh on the performance of the Canadian economy.

The Australian and New Zealand dollars continue trending higher aided by strong commodity prices and concerns about the US economic slowdown.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group

Posted in: Economy,Finance and Investment,Forex