NEWS / Foreign Exchange

Despite initially gaining ground in early morning trading

Despite initially gaining ground in early morning trading, the U.S. dollar weakened against the Euro and Yen after weaker-than-expected U.S. existing home sales released for the month of September. U.S. home sales fell 8.0 percent in September to a record low of 5.04 million homes.

In other news Merrill Lynch announced a 2.3 billion dollar third-quarter loss with write downs totaling $7.9 billion due to investments in subprime mortgages. The weaker housing report coupled with Merrill Lynch??™s announcement will all but cement a Fed. rate cut of 25 basis points at next Wednesday??™s meeting.

The Euro initially weakened against the dollar, yen and pound as traders moved to safer haven investments, but managed to gain some ground on the weak housing data. Also releasing out of the Euro Zone was Manufacturing PMI figures which fell to 51.5 in October, while the services number strengthened to 55.6. Look for the Euro to push higher as fundamentals take focus, with the Euro Zone/U.S. interest rate differential moving in favor of Europe??™s single currency.

Sterling weakened against both the yen and the dollar as stock markets tumbled and investors pulled money out of the carry trade. With little UK data due out, look for the pound to remain range bound as the market digests a likely rate cut from the Fed. next week.

The Japanese yen strengthened against its U.S. counterpart as the yen-funded carry trade unwound. Also releasing was Japan??™s merchandise trade surplus which climbed to its highest level at 1,638 billion. Look for the yen to hold on to its gains as investors continue to side line the carry trade.

The Canadian dollar weakened against the greenback as oil dropped. Oil prices fell to $85 a barrel off of Friday??™s record $90 a barrel. The market will start to look towards Canada??™s October Business Conditions Survey which is due out on Friday. Look for the loonie to remain range bound ahead of Friday??™s report.

The Australian and New Zealand dollars initially strengthened on strong Aussie inflation data, but couldn??™t hold on to their gains against the dollar as carry trades unwound. Australia's consumer price index rose 0.9 percent and was 2.9 percent higher year to date, cementing a rate hike from the Reserve Bank of Australia next month. With a rate hike priced into the market next month in Australia and the Reserve Bank of New Zealand expected to hold overnight rates at 8.25 percent, look for both currencies to track higher.

The Mexican peso weakened after consumer price data came in lower-than-expected at 0.32 percent, while core inflation rose higher-than-expected to 0.21 percent. The market will look towards Friday??™s Banxico meeting where expectations are that overnight rates will remain on hold at 7.25 percent.