Expert Analysis of Today's Market

• In NY trading Tuesday, the dollar fell after the Federal Open Market Committee cut the federal funds rate 50 basis points to 4.75% and the discount rate 50 basis points to 5.25%. The FOMC said: “Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.” The FOMC still sees inflation risks: “Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.”


• The EUR/USD rose to an all-time high after the Fed cut interest rates more than expected. We expect a test of 1.40. If this resistance is broken, the pair is likely to move to 1.42. There is support at 1.38. Gold rallied to a 27-year high.

Financial and Economic News and Comments

US & Canada

• US producer prices fell a larger-than-forecast 1.4% m/m in August, following a 0.6% m/m increase in July, the Labor Department said. Core prices, which exclude fuel and food costs, rose 0.2% m/m after a 0.1% gain in July. A drop in fuel expenses pushed prices down in August. The producer price index rose 2.1% y/y and core PPI rose 2.2% y/y in August.

• US foreclosure filings rose 36% m/m in August and 115% y/y, hit by declines in once-hot housing markets such as California, Nevada and Florida, according to RealtyTrac’s. The increase in foreclosure filings this month might be the beginning of increased foreclosure activity, as a large number of subprime adjustable rate loans are beginning to reset now, sharply increasing mortgage payment for some borrowers.

Europe

• The ZEW index of German investor and analyst confidence fell to a lower-than-expected in September. The economic expectations component fell to -18.1 in September from -6.9 in August. The current economic situation gauge fell to 74.4 in September from 80.2 in August. Sentiment has peaked as investors are concerned that the credit crunch and the euro’s high value may adversely impact the German economy.

• UK consumer prices rose a less-than-expected 1.8% y/y in August, compared with 1.9% y/y in July. Prices rose 0.4% m/m August, the Office for National Statistics said. Inflation peaked at 3.1% y/y in March 2007.

Asia-Pacific

• Japan’s tertiary index, a gauge of service demand, fell 0.5% m/m in July, the Trade Ministry said.

FX Strategy Update