Expert Analysis of Today's Market

• Testing technical levels on Monday, the dollar was little changed against the euro but lower versus the yen ahead of tomorrow’s US housing data. The yen strengthened against major currencies despite higher equity prices. The markets have speculated that the G-7 will address the euro’s strength and exchange rates at its next meeting in October. Hovering just above its all-time low of 78.19 set in 1992, the dollar index is likely to test this important support. If the 78-handle is broken, the dollar index will fall dramatically. If not, a dollar rally is likely.


• The EUR/USD pared gains after the euro rose to the record high at $1.4130. The pair is likely to test the 1.42 resistance. The dollar outlook remains negative based on increasing recession risks. The European Central Bank is under pressure from European politicians to ease its monetary policy and added more reserves today in a sign that the European credit crunch is not over. Our short GBP/USD stopped out on Friday at 2.0210, but we are selling the pair again.

Financial and Economic News and Comments

US & Canada

• The potential negative consequences of the credit crunch should not be underestimated, the International Monetary Fund said in its Global Financial Stability Report. Global economic instability stemming from creditmarket turmoil in the US is “likely to be protracted,” the IMF said. “Credit conditions may not normalize soon, and some of the practices that have developed in the structured credit markets will have to change.”


• The Dallas Fed index for the current level of general business activity fell to -4.6 in September from -1.8 in August, the lowest reading since December 2006. The raw materials price index fell to 17.9 from 21.6, with 30% of the manufacturers reporting higher costs in September.

Europe

• The UK budget deficit rose to a stronger-than-expected £9.1 billion ($18.4 billion). The shortfall was £1.3 billion more than a year earlier as spending rose faster than revenue, the Office for National Statistics said.


• A close aide to French President Nicolas Sarkozy, Henri Guaino, said the euro’s strength against the dollar and yuan was eroding the competitiveness and productivity of firms and the French government could not “stay silent in the face of this absurdity.” However, European Central Bank President Jean-Claude Trichet brushed aside the criticism by calling it an outdated debate, saying the ECB’s first mandate was to ensure price stability.


• Eurozone industrial orders fell 4.0% m/m in July. A fall of 3.0% m/m was expected. German industrial new orders fell 3.0% m/m and rose 10.4% y/y in July.

Asia-Pacific

• Holiday in Japan and some other Asian countries.

FX Strategy Update