Expert Analysis of Today's Market

• The dollar fell against major currencies on Wednesday after the Federal Reserve, as forecast, cut the Fed funds rate by 50 basis points to 3.0%, to prevent the US economy from slipping into a recession. The Fed said downside risks remain, stressing that it will continue to assess financial markets and the economy and “act in a timely manner as needed.”


• The EUR/USD finally penetrated the 1.48-handle resistance on the increased European interest rate advantage. The 1.48-handle now acts as support. There are several natural resistance levels: the 1.49- handle, the old high 1.4966, and the 1.50-handle. The Fed’s statement was more dovish than expected and the futures market is pricing in more than a 25 basis-point rate cut at the next FOMC meeting.

Financial and Economic News and Comments

US & Canada

• The Federal Open Market Committee cut the Fed funds rate by 50 basis points to 3.0%. The discount rate was also cut by 50 basis points to 3.5%. Dallas Fed President Richard W. Fisher dissented in favor of no change in rates. The Fed has now lowered rates 125 basis points this year to prevent the US economy from sinking into a recession. “Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity,” the FOMC said. Downside risks remain and “financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the FOMC stressed.


• The US economy grew a less-than-expected 0.6% q/q in Q4 2007, down sharply from a 4.9% q/q rate in Q3, the Commerce Department reported. The slowdown was triggered by a slump in building activity which fell 16.9%, the biggest fall in 25 years, as housing prices collapsed. Consumer spending added 1.37 percentage points to growth. Inventories fell $3.4 billion in Q4. The change in inventories subtracted 1.3 percentage points from growth. Including changes in inventories, gross private domestic investment subtracted 1.64 percentage points. Net exports contributed 0.41 of a percentage point to growth. Government spending contributed 0.5 of a percentage point to growth.

• The US core PCE price deflator rose 2.7% in Q4 after rising 2.0% in Q3. The price index for gross domestic purchases, which measures prices paid by US residents, rose 3.8% in Q4 after increasing 1.8% in Q3. The chain-weighted GDP price index increased 2.6% after rising 1.0%. The rising prices indicate inflation risks remain in the US economy.


• ADP predicted US private payrolls will add 130K jobs in January, about 100K larger than the current consensus estimate. ADP has overestimated job growth recently, but we think job creation will be stronger than the consensus forecast as initial jobless claim numbers indicate stronger job growth.

Europe

• Bloomberg’s retail sales PMI for the eurozone rose to 48.1 in January from 46.0 in December. Despite the increase, the gauge indicates sluggish retail sales as the PMI is below 50. The gauge of Italian sales dropped to 43 from 44.7, the German index rose modestly to a still low 44.2 from 44, and the French index rose to 56.2 from 49.1.


• The UK Treasury announced that Mervyn King has been reappointed as Governor of the Bank of England for a second term. The new five-year contract begins when his current deal expires in June.

Asia-Pacific

• Japan’s industrial production increased a less-than-expected 1.4% m/m in December, the government said.

FX Strategy Update