Expert Analysis of Today's Market

• The dollar rose modestly against other key currencies Wednesday as lawmakers debated the administration’s financial rescue package. The credit crunch worsened and credit spreads widened as banks hoarded cash amid deepening concern that the rescue plan may get delayed. Federal Reserve Chairman Ben S. Bernanke warned that markets were “under extraordinary stress” and “action by Congress is urgently required to stabilize the situation.”
• The EUR/USD fell modestly as Congress debated the merit of the US Treasury Department’s rescue plan and weakening German business confidence added to evidence that euro-area economic growth is slowing. The pair is below the important 1.49-resistance. If this is broken, the EUR/USD may rise to the 1.55-handle. However, it is more likely the pair will trade between 1.43-1.49 until Congress decides on the rescue plan.

Financial and Economic News and Comments

US & Canada

• US existing home sales fell a more-than-forecast 2.2% to an annual rate of 4.91 million in August, following 5.02 million in July, data from the National Association of Realtors showed. Existing home sales dropped 10.7% y/y. Sales increased in the Midwest and South, but declined in the Northeast and West. By type of home, sales fell for both single-family units and condos/co-ops. The median price of an existing home declined to $203,100 in August (not seasonally adjusted) and fell 9.5% y/y. Single-family home prices dropped 9.7% y/y. The months’ supply of existing homes at the current sales rate fell to 10.4 in August from 10.9 in July. The months’ supply of single-family homes fell to 10.0 from July’s 10.4. The decline in property values threatens to hurt US consumer spending, which Federal Reserve Chairman Ben S. Bernanke said would be “sluggish at best” in coming months.

Europe

• In Germany, the Ifo business climate index dropped to 92.9 in September, a fourth consecutive monthly decline and the lowest since May 2005, from 94.8 in August, the Ifo Institute for Economic Research reported. The business conditions indicator dropped to 99.8 from August’s 103.2. The business expectations measure declined to 86.5 from 87.0.

• The UK retail sales balance fell to a reading of -27% in September, a third straight month with sharply contracting sales, yet better than August’s -46%, according to the latest Distributive Trades Survey released by the Confederation of British Industry. Sales expectations for October remain very weak, the CBI survey showed.
• The euro-area’s current account deficit considerably narrowed to €1.7 billion in seasonally adjusted terms in July, due to improvements on services and income transfers, from June’s revised €6.1 billion deficit, according to data from the European Central Bank. Larger surpluses in services, €4.4 billion, and income transfers €2.3 billion have offset deficits in current transfers, €6.8 billion, and goods transfers, €1.6 billion.
• ECB Governing Council member Michael Bonello said the eurozone economy will probably recover in Q4 2008, suggesting he sees no need to cut interest rates after the global credit crunch worsened. “I still think by the fourth quarter we should be out of the lowest point, at least past the trough,” Bonello said.

Asia-Pacific

• Confidence among Japanese manufacturers was -10 in Q3 2008, near a 4-year low, compared with -15.1 in Q2, the Cabinet Office and Finance Ministry said. A negative number indicates pessimists outnumber optimists. The Japanese economy is in a recession and probably will not recover until next year as exports weaken and rising prices discourage Japanese consumer spending.

FX Strategy Update