Expert Analysis of Today's Market

• Testing technical levels on Monday, the dollar was mostly lower against the European currencies and little changed versus the dollar block currencies. After successfully testing the 113 support overnight, the USD/JPY traded higher but came under pressure as US stock prices weakened in early New York trading. The pair is at important support at 113 and resistance at 114.


• The EUR/USD rose to the highest level in a month on speculation the Federal Reserve will cut interest rates next week while the European Central Bank may raise borrowing costs by yearend. Two-year German government bonds yielded more than comparable-maturity US Treasuries for a second trading day. The EUR/USD is testing the resistance in the 1.38-area. If this is broken, the pair may move above the psychological important 1.40 resistance. This would open up the possibility of the euro trading in the low to mid 1.40s.

• The US dollar index has marginally dropped below the 80-handle. The index fell to as low as 79.81 today, the weakest in 15 years and slightly below important support levels. If the index finds support here and can break the 2-year bear trend, the index will rally significantly. However, there are not much signs of a recovery yet. The technical outlook is still bearish and a test of 1992’s low is possible. The recent breakout in the gold market is also a bearish indication for the dollar’s outlook.

Financial and Economic News and Comments

US & Canada

• Federal Reserve Bank of San Francisco President Janet Yellen said the US economy is under “downward pressure” from the turmoil in credit and housing markets. “It is critical to take a forward-looking approach -- gauging the effects of recent developments on the outlook, and, importantly, the risks to that outlook,” Yellen said. Declining home prices and rising unemployment may cause significant risks to consumer spending, she said.


• Federal Reserve Bank of Atlanta President Dennis Lockhart said he sees conclusive signs of economic weakness. “Last Thursday, I said in a speech that I have not seen conclusive signs of weakness in the broader economy,” said Lockhart in prepared remarks in Atlanta today. “Friday’s data, however, shows employment was beginning to soften back in June. This news should be evaluated with recently positive reports in retail sales.”

Europe

• The Bank of England should do more to calm the fear and panic in financial markets to prevent corporate borrowing costs from rising further, former policy maker Willem Buiter said. When fear and panic paralyze a market, it does not make sense to say “let the market sort it out,” Buiter said. “They should widen the scope of the collateral they accept. They should also, certainly in the overnight market, make sure the interbank rate doesn’t get away from them.”

Asia-Pacific

• Japan’s economy contracted more than expected, revised data showed. The Q2 GDP fell 0.3% q/q and contracted 1.6% y/y, the Cabinet Office said. The result was less than the government’s initial estimate for 0.1%. Capital investment declined 1.2% and consumer spending was downwardly revised to a 0.3% increase from the initial estimate for a 0.4% gain. Public investment was revised to a 2.6% drop from the previous estimate for a 2.1% decline.

FX Strategy Update