Fundamentals

The dollar will continue to secure some important defensive support, but the fundamental risks are growing and the financing burden is also escalating

The Euro pushed to highs of 1.27 as Wall Street secured opening gains. The Euro and US stocks were both unable to sustain opening gains and it weakened back to the 1.26 region. Headline consumer prices should also decline sharply on Wednesday which will given the Fed some degree of policy flexibility.

The latest NAHB housing index weakened further to a record low of 9 in October from 14 the previous month. The association noted that lenders had pulled back from new financing while consumer confidence had also weakened sharply. The housing starts data will, therefore, be watched closely on Wednesday amid fears of a further downturn in housing activity.

In this environment, there will be additional pressure for fresh policy measures to support the economy and Fed Governor Stern suggested that the Fed Funds rate could be cut to below the current 1.0% if conditions warrant.

Congressional negotiations surrounding the auto sector will continue to be watched closely while Treasury Secretary Paulson defended the switch of emphasis for the TARP programme. Acrimonious discussions would tend to unsettle the dollar.