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Thursday December 16, 2004 - 17:21:49 GMT
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Forex Market Commentary and Analysis (16 December 2004)

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3335 level after failing to get through the $1.3435 level earlier in the session. The all-important Q3 current account deficit data were released today and they saw a rise to a record US$ 164.7 billion as the goods and services deficit rose to $155.3 billion. These data follow yesterday’s surprisingly weak U.S. Treasury TIC foreign flows data that suggested the U.S.’s trade deficit was recently underfunded by foreign investments. If this materializes into a trend, this could be very negative for the dollar in Q1. Other data released today saw November housing starts plunge 13.1%, the sharpest drop in more than one decade. Weekly initial jobless claims data fell 43,000 to 317,000 in the week ending 11 December – the largest decline since December 2001 – while the four-week moving average of continuing claims also reached its lowest level since May 2001. Traders are still talking about President Bush’s verbal intervention yesterday, an obvious attempt to satiate the visiting PM Berlusconi of Italy. Bush said the “best thing that we can do from the executive branch of government in America is to work with Congress to deal with out deficits (to support the dollar)” and reiterated the U.S.’s strong-dollar policy. He added “markets should make the decision about the relationship between the dollar and the euro.” These were all comments that traders have heard before, but Bush added “Therefore, to the extent that the federal government is involved with strengthening -- making the conditions such that a strong dollar will emerge, we'll do everything we can in the upcoming legislative session to send a signal to the markets that we'll deal with our deficit, which, hopefully, will cause people to want to buy dollars.” Furthermore, he spoke about the Fed and the dollar saying “Independently, the Federal Reserve, under the leadership of Alan Greenspan, raised the interest rates yet again, a signal to the world markets that the Chairman is also aware of the relative currency valuations between the euro and the dollar.” While probably unintended, these remarks suggest the weak dollar played a hand in the Fed’s decision to raise rates this week. Data released in the eurozone today saw EMU-12 CPI at +2.2% with the core rate falling back below 2.0%. This development is positive for ECB policymakers because it suggests they can avoid second-round effects. ECB’s Padoa-Schioppa today said the “process of correction of (the U.S. deficits) will take years” and said it is “unthinkable that the rebalancing comes only via changes in the exchange rate.” Euro bids are seen around the $1.3240 level.


The yen moved sharply higher vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥103.45 level after being unable to get back above the ¥104.50 level during Australasian dealing. MoF’s Watanabe spoke about exchange rates overnight saying recent moves have been “rough” and “volatile” and added the government is “concerned about rough movements.” Speaking about intervention, he said “solo intervention is still effective but in principle, the effectiveness will be limited.” Japan has not overtly intervened in the FX market since earlier this year. The Nikkei is reporting the government will downgrade its assessment of the economy for the second consecutive month soon in what would be the first back-to-back downgrade since November 2002. In energy news, OPEX has reduced its estimates for 2005 global oil demand to 83.23 million barrels per day, down from the previous estimate of 83.41 million barrels. The Nikkei 225 stock index fell 0.3% to close at ¥10,924.37. Dollar offers are seen around the ¥104.20 level. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥138.60 level after encountering resistance around ¥140.15 during Australasian dealing.


The British pound could not sustain its gains and depreciated sharply from the US$1.9550 level today after gaining more than one figure. North American dealers pressured bids around the $1.9340 level after the $1.9400 figure gave way. Data released in the U.K. today saw November retail sales rise 0.6% m/m and 6.1% y/y, a positive number following October’s 0.5% decline. The November headline number was much higher-than-expect and could presage strong holiday sales in the U.K. These data follow stronger-than-expected CPI data earlier this week. Chancellor Brown reaffirmed his fiscal spending plans today saying and added the U.K. still plans on balance the budget throughout the economic cycle. Cable bids are seen around the $1.9280 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.6845 level and was capped around the ₤0.6915 level.


The Swiss franc reversed course and moved lower vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1395 level and later tested offers around the CHF 1.1565 level. The moves were volatile throughout the North American session as traders bought back dollar across the board. As expected, Swiss National Bank kept interest rates unchanged but said the “normalization process” of tightening rates is not over yet. SNB reported “Less dynamic growth, the weaker US dollar and the decline in excess liquidity have dampened the anticipated inflationary pressure somewhat… The National Bank's monetary policy continues to have an expansionary effect.” Dollar offers are seen around the CHF 1.1620 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5290 level after testing offers around the CHF1.5365 level.


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