The Dollar sank to record lows against the Euro and a basket of major currencies on Tuesday as bleak warnings of more pain in the credit sphere reinforced views of a Federal Reserve rate cut in December. A cut in US interest rates is negative for the Dollar, weakening its appeal versus higher-yielding currencies.
Analysts are waiting to see if European Central Bank President Jean-Claude Trichet, in remarks expected on Thursday, would hint at a rate rise next month for the euro zone. Analyst cited flow data showing an extended outflow of investments from the United States to European equities and emerging market central banks diversifying their foreign exchange reserves from dollars to euros.
The drumbeat of bad news for banks kept the market on edge, already uneasy over Citibank's Sunday forecast of up to $11 billion in mortgage-related losses. On Tuesday, major US home lender IndyMac Bancorp Inc posted a net quarterly loss of $202.7 million. Germany's Commerzbank said it was writing off 291 million Euros of assets exposed to risky US mortgages. Bank of England Governor Mervyn King said it would take months for banks to reveal their full losses stemming from risky mortgages and former Federal Reserve chief Alan Greenspan said the housing debacle was a major risk to the US economy.
Federal funds futures pricing on Tuesday implied a 64% probability of a December rate cut, having ranged from 46% to over 90% since Oct. 18.
The Canadian Dollar raced higher, supported by rallying prices of Oil and Metals, trading -1.53% yesterday and 1.33% today down to 0.9066.
Bank of Canada Senior Deputy Governor Paul Jenkins said the recent Canadian dollar surge is "outside normal bounds," and sustained strength would pose risks to the Canadian economy.
NzdUsd gained 1.56% to 0.7825. The AudUsd rose 1.23% to 0.9319, helped by expectations of a benchmark rate hike Wednesday to an 11-year peak of 6.75%, which could make local assets more attractive to foreign investors. Australia is a major metals exporter, and the Aussie was also helped by surging world metals prices. Gold prices hit a 28-year high 845.40.