The major currencies whipsawed in the Tuesday session, with the greenback recovering from earlier losses in New York trading. The dollar tumbled to lows against the euro and sterling at 1.2813 and 1.5248, respectively, before recovering by the afternoon session.

US economic reports released earlier in the session continue to confirm the dire conditions facing the economy. The consumer price index dropped by 1% in October, larger than expectations for a 0.8% decline from a flat reading in the previous month, marking its steepest decline on record. The headline annual CPI figure eased to 3.7%, down from 4.9% a year earlier. The core CPI figure also posted a 0.1% decline versus an increase of 0.1% in September and down to 2.2% from 2.5% in the previous year. The record declines in consumer prices again raises fears of deflation and highlights the quandary the FOMC currently finds itself in. Meanwhile, October housing starts posting a 4.5% decline compared with the 6.3% decline in September to 791k units and building permits plunged by 12% to 708k units.

The FOMC minutes from the October meeting revealed that economic developments could "force more rate cuts and review of liquidity facility adequacy". The Fed said even after the 50-basis point rate cut, downside risks to growth remain and some officials acknowledged deflation risk posing a challenge as a result of the low Fed funds rate. The outlook in the minutes was largely bleak with the expectations for restrained growth in 2009 as a result of persistent credit market strains and housing woes. The FOMC also expects gloomy figures for 2009 with unemployment seen climbing to 7.1-7.6%, and GDP growth ranging from -0.2-1.1%. We anticipate a 50-basis point rate cut by the FOMC when it next meets to deliberate monetary policy on December 16th.

The calendar for Wednesday consists of weekly jobless claims, seen easing to 505k from 516k, October leading indicators - estimated to post a 0.6% decline from 0.3% in September and the November Philadelphia Fed survey, forecast to improve to -35.0 from -37.5.