NEWS / Foreign Exchange

Credit woes are keeping the U.S. dollar under pressure

Credit woes are keeping the U.S. dollar under pressure. The dollar extended its recent losses overnight, driving the euro to a fresh lifetime high as investors fretted over the health of the U.S. economy. The credit crisis, stemming from U.S. home loans to people with poor credit histories, which were packaged and sold to investors around the globe, has caused liquidity problems and contributed to negative sentiment towards the dollar. The market will remain focused on potential Fed rate cuts, in December. Recent meetings of the Federal Reserve, which has slashed the fed funds rate by 75 basis points in the past two months, have contributed to the falling dollar. This is in sharp contrast to the European Central Bank, who has kept up hawkish rhetoric due to concerns about inflationary pressures.

The Euro remains near record highs due to omnipresent USD weakness following the recent Fed rate cut and equity market turmoil. Speaking to reporters in Berlin, Euro group chairman Jean-Claude Juncker said today that Euro zone nations are "allergic" to excessive volatility in the euros??™ foreign exchange rate, and that exchange rates should reflect economic fundamentals. He also welcomed recent comments made by the United States in support of a strong dollar and by Japan that the yen should reflect economic fundamentals.

The British pound remained near 26-year highs against the USD despite soft British retail sales figures as investors continued to worry about the health of the U.S. economy. A survey by the British Retail Consortium released on Tuesday showed British retail sales growth slowed to its weakest pace in nearly a year in October. The data is likely to boost speculation that interest rates will have to come down sooner rather than later, although a BoE rate cut on Thursday is still seen as unlikely. Bank of England governor Mervyn King said in an interview today that it could be several more months before banks return to normal after the credit crunch stemming from troubles in the U.S. sub prime mortgage market

The Japanese yen continues to trade within its recent ranges against the USD was steady against the dollar on Friday, recovering from a brief dip as sliding stock markets kept investors on edge about the credit market troubles. In the past few months the yen has tended to jump when sliding stock markets prompt a reduction in risky positions such as carry trades -- using the low-yielding Japanese currency as a cheap source of funds to buy higher-yielding currencies and assets. With the BOJ widely seen waiting until the first part of 2008 at the earliest, before raising rates again, the yen has suffered as investors have gradually returned to carry trades.

The continuing surge in commodities prices and negative sentiment towards the U.S. dollar pushed the Canadian dollar to its highest level against the U.S. dollar since the late 1800s. The CAD should remain well supported in the next months, especially if the likelihood of another rate cut in the US increases.

The Australian dollar continued to climb higher overnight ahead of a widely expected rise in interest rates when the Reserve Bank of Australia (RBA) meets on Wednesday. This speculation is helping to keep the currency well supported as a rate rise would make Australian assets more attractive to investors chasing higher yields.

Supported by climbing commodity prices and its yield appeal, the New Zealand dollar pushed modestly higher. The kiwi was also benefiting from a stronger Aussie dollar, which has been underpinned by expectations that the Reserve Bank of Australia (RBA) will raise its key interest rate a quarter-point to an 11-year peak of 6.75 percent on Wednesday.

The Mexican peso remains range bound but well supported as Mexican stocks jumped in early trade, snapping back from five straight days of losses on gains in bellwether telecom America Movil. The IPC has sagged in recent sessions as investors worry that lingering troubles in U.S. credit markets could hit the economy in the United States, Mexico's top trading partner.