The U.S. dollar continues its slide to new record lows against the major European currencies

The U.S. dollar continues its slide to new record lows against the major European currencies. Despite solid productivity numbers, the dollar extended its recent losses overnight as it is under fire from all fronts, including high oil and commodity prices, worries about the U.S. economy and comments from China which stoked fears about more reserve diversification out of the dollar. With risk aversion a major market topic, you are starting to see mo re investors moving out of the USD and moving into traditional safe haven currencies such as the Swiss franc, which currently stands at 12 year highs against the USD.

Comments out of China today delivered blow to the dollar as a top lawmaker, Cheng Siwei, vice-chairman of the standing committee of the National People's Congress, suggested a bigger role for the euro in its $1.43 trillion hoard of foreign reserves and a central banker said the dollar is losing its global currency status. China does not disclose the composition of its reserves, but it is estimated that China holds 65-70% in dollars and a much smaller share in euros. If China were to balance its FX reserve holdings between the dollar and the euro, this would represent a massive selling of dollars and buying of euros, weakening the USD even more. Xu Jian, vice head of the People's Bank of China's Communist Party school, twisted the knife by saying recent surges in gold and oil was a reflection of the dollar's loss of standing. He said he expected the dollar to weaken further in 2008 under the impact of the gaping U.S. trade deficit. That could push the price of gold to $1,000 an ounce from a 28-year peak of $840 scaled on Wednesday, said Jian.

Verbal intervention out of Italy today has done little to stem the euro??�s march to record highs. With some analysts expecting the euro to hit 1.50 before year end, it is unlikely that we will see a sharp correction anytime soon. European politicians have become increasingly vocal about the euro, which is up 11 percent this year and 78 percent from its 2000 low, fearing its strength will squeeze exporters out of global markets. The euro's relatively gradual appreciation has helped prevent calls for immediate intervention but a sharp move could prompt the ECB to jump in. Market participants will look for comment on exchange rates from European Central Bank Jean-Claude Trichet at his post-interest rate meeting news conference on Thursday. If Trichet fails to show displeasure with the euro/dollar rally at tomorrow's press conference could likely trigger the move to $1.50. The euro is also supported by lingering market expectations for the U.S. Federal Reserve to cut interest rates in December, and for the ECB to keep euro zone rates steady for a while. Analysts will watch for signs that European companies are suffering from a tougher export environment will crank up the pressure on the ECB to act.

The British pound surged to fresh 26-year highs against the USD on expectations that U.S. data will continue to come in weaker and the Bank of England will not change rates for the next few months. Markets await the outcome of Thursday??�s BoE meeting for direction.

The Japanese yen continues to trade within its recent ranges against the USD. 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 breached a 23-1/2-year high after the Reserve Bank of Australia raised rates by 25 basis points to an 11-year high of 6.75 percent and left the door open for more tightening. The potential for additional rate increases is helping to keep the currency well supported as another rate increase would make Australian assets more attractive to investors chasing higher yields. The AUD has risen nearly 16% this year, buoyed by firm commodity and gold prices.

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 well supported by today??�s Reserve Bank of Australia??�s 25 bp increase.