U.S. Forex Market Commentary

U.S. Forex Market Commentary

EURO

The euro strengthened vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4730 level and was supported around the $1.4555 level. The common currency rocketed to a new lifetime high following negative remarks about the U.S. dollar from a Chinese official. Notably, French President Sarkozy said currency “disarray” could lead to an “economic war.” Many traders are wondering if unilateral or multilateral intervention may be implemented to smooth out some of the move in the U.S. dollar. The Bush administration seems to have a hands-off policy regarding the greenback and does not seem to want to stray far beyond its “strong dollar” mantra. Data released in the U.S. today saw Q3 productivity print at 4.9%, much stronger than the 3.3% rise that was expected and the largest gain in four years. Also, Q3 unit labour costs fell 0.2%, the first decline since Q3 2006 and unit labour costs have risen 4.3% over the past year, down from 5.1% y/y in Q2. The pullback in unit labour costs will please Federal Reserve officials. Traders are generally unsure if the FOMC will ease monetary policy further in December or if they will remain on hold. The Fed’s decision will largely be data-dependent and if a further erosion is seen in the U.S. housing sector, the Fed may be forced to reduce borrowing costs further. Richmond Fed President Lacker reported the Fed “did the right thing” by cutting rates in response to the recent credit market turmoil. Other data released in the U.S. today saw September wholesale inventories up 0.8% with wholesale sales up 1.3%. In eurozone news, German September industrial output was up 0.3% m/m and Germany’s Five Wise Men reported 2008 GDP should slow to 1.9% from an expected 2.6% gain this year. Most traders do not expect the European Central Bank will change interest rates tomorrow. Euro bids are cited around the US$ 1.4560 level.