• The dollar recovered some overnight losses trading little changed early NY trading Monday after Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed funds rate is low. The dollar is oversold, trying to find some support. Risk aversion, still the dominant theme in the FX market, pushed the yen higher, while the dollar was pressured as US growth and interest rate differentials continue to deteriorate. The Australian dollar rallied on rate hike speculation after a report showed inflation remains high.
• The EUR/USD fell from a record high after Luxembourg’s Prime Minister Jean-Claude Juncker said he was becoming “increasingly concerned” about the euro’s rally and European Central Bank President Jean-Claude Trichet said the strong dollar policy is “very important.” Their remarks seem an attempt to talk down the EUR/USD. The pair is overbought as indicated by the high relative strength index. There is strong support in the 1.49-1.50 area.

Financial and Economic News and Comments

US & Canada

• The US manufacturing index dropped to 48.3 in February, the lowest level since April 2003, from 50.7 in January, the Institute for Supply Management said. New orders decreased to 49.1 from 49.5, while a production measure dropped to 50.7 from 55.2. The prices gauge fell modestly to 75.5 from a high 76.0.

• Federal Reserve Bank of Philadelphia President Charles Plosser said the benchmark interest rate is now below the optimal and should be raised when financial markets stabilize. “We are now, perhaps, in a period of extraordinary circumstances and have deviated from the benchmarks suggested by simple rules,” Plosser said. “Such deviations should be temporary and limited and promptly reversed when conditions return to normal.”

• US construction spending fell a larger-than-forecast 1.7% m/m in January following a downwardly revised 1.3% m/m drop in December, the Commerce Department said. Private residential construction spending fell 3.0% m/m in January after a 2.6% m/m decline in December. Non-residential construction, including public projects, fell 0.8% m/m in January, compared with a 0.5% m/m decrease in December.

• Canada’s GDP slowed to a 0.8% q/q annualized rate in Q4 2007, the slowest pace since 2003 as exports declined, Statistics Canada reported. Slower economic growth is likely to pressure the Bank of Canada to lower interest rates.

Europe

• Luxembourg Prime and Finance Minister Jean-Claude Juncker said he was becoming “increasingly concerned” about the euro’s rally. European Central Bank President Jean-Claude Trichet said the US government’s strong-dollar policy is “very important.”
• EMU manufacturing PMI fell in line with expectation to 52.3 in February from 52.8 in January and Germany’s PMI fell marginally to 54.3 in February from 54.4 in January, NTC Economics Ltd said.

• European inflation in February remained at the highest level since the euro’s 1999 debut, keeping pressure on the ECB to leave interest rates on hold even as economic growth cools. EMU consumer-price inflation remained at 3.2% y/y in February, matching January’s rate, Eurostat said.
• The UK manufacturing PMI rose from 50.7 in January to 51.3 in February, slightly higher than expected, the Chartered Institute of Purchasing and Supply said. The price gauge rose to the highest on record.

Asia-Pacific

• Japan’s monthly wages rose 1.0% y/y, the most since June 2006, the Labor Ministry said. Bonuses gained 12.1%.

• The People’s Bank of China’s Vice Governor Yi Gang sees curbing 11-year-high inflation as the PBC’s top priority and will use a variety of monetary policy tools to cool surging prices. “Inflationary pressure is still relatively high,” Yi said.

• The TD Securities-Melbourne Institute monthly inflation gauge rose 0.3% m/m in February, following a 0.3% m/m increase in January. The gauge rose 4.0% y/y in February after rising 3.9% y/y in January.

FX Strategy Update