Expert Analysis of Today's Market

• The dollar fell against most key currencies except carry-trade funding currencies on Tuesday on increased speculation the Federal Reserve will cut its benchmark 5.25% interest rate by at least 25 basis points at its Sept. 18 meeting. Lower growth expectations and interest rates in the US are eroding support for the dollar. The yen fell as risk aversion diminished on stronger global stock markets as investors rebuilt carry-trade positions. The USD/JPY is testing important resistance in the 114-area.


• Rising for the fifth day to a near-record high, the EUR/USD is testing resistance in the 1.3850-area. If this is broken, the pair may rally. Fed Governor Frederic S. Mishkin said yesterday to the Money Marketeers of NYU that there is no specific value for the dollar that should be targeted as it would be counterproductive for the overall monetary policy.

Financial and Economic News and Comments

US & Canada

• The US trade deficit narrowed 0.3% to $59.2 billion in July from June’s revised $59.4 billion that was bigger than previously estimated, the Commerce Department said. A $59 billion deficit for July was expected. Exports rose 2.7% while imports rose 1.8%. The rise in imports reflected greater purchases of crude oil, drilling equipment and appliances. Overall demand for foreign-made capital goods slackened, led by a drop in computers. The inflation-adjusted trade deficit declined to $53.5 billion in July, the smallest since September 2004.

Europe

• The European Commission cut its growth forecast for the euro-area economy after the US subprime debacle raised borrowing costs worldwide. The EMU economy will probably expand 2.5% this year, down from a May forecast of 2.6%, the European Commission said.


• The UK trade deficit rose to a wider-than-expected £7.1 billion ($14.4 billion) in August, compared with £6.5 billion in July, the Office for National Statistics said. The imports rose 4.0% outpacing the 2.6% gain in exports.

Asia-Pacific

• China’s inflation rate accelerated more than expected to a 10-year high. Consumer prices climbed 6.5% y/y in August after rising 5.6% y/y in July, the National Bureau of Statistics said. Food prices jumped 18.2% in August after gaining 15.4% in July. Meat and poultry soared 49% after climbing 45.2%. Non-food inflation stayed at 0.9%.


• China’s trade surplus in August widened 33% y/y to $24.97 billion, the second-highest monthly total.


• Japan’s machinery orders surged a stronger-than-expected seasonally adjusted 17% m/m to ¥1.12 trillion ($9.9 billion) in July, the Cabinet Office said.

FX Strategy Update