• The greenback plunged against most key currencies on Tuesday reversing Monday’s gains as the Federal Open Market Committee lowered its target for the federal funds rate 75 basis points to 3.5%. The yen fell against all major currencies as US equity prices stabilized after the Fed’s emergency move. US stocks pared their biggest decline since 2002 as the Fed’s rate cut helped mitigate concerns of a credit crunch and recession. The unscheduled cut increased the chance of further cuts at the Fed’s regular meeting on January 29-30. The Canadian dollar rose from a 4-month low after the Bank of Canada lowered its benchmark lending rate 25 basis point to 4.0%. The Swiss franc, Australian dollar and sterling also gained after the Fed’s rate cut.
  • The EUR/USD reversed yesterday’s drop and rose the most since November 20. The increased volatility is the result of increased uncertainty of the economic outlook and increased risk aversion resulting from the meltdown in global equity prices. Lower stocks and increased risk aversion pressure the pair as investors sell assets and park the money in short-term dollar instrument. Increased US recession risk supports the pair as it deteriorates US relative growth and interest rate differentials, at least until the realization the recession may spread and lower growth and rates abroad. There are support in the 1.45-area and resistance in the 1.48-area.


Financial and Economic News and Comments

US & Canada

  • The Federal Reserve lowered its benchmark interest rate 75 basis points to 3.5% in its first emergency move since 2001. Policy makers were not scheduled to gather on rates until January 29-30. The discount rate was also lowered by 75 basis points to 4.0%. The Federal Open Market Committee (FOMC) said: While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
  • The Richmond Fed’s manufacturing index for January decreased to -8 from December’s reading of -4, new orders moved up 3 points to -3 and the jobs index inched down 7 points to -2. The index does not yet indicate a recession in the manufacturing sector, just a slowdown.


  • Treasury Secretary Henry Paulson said Congress and the Bush administration need to agree quickly on a package of tax cuts and other measures to boost the US economy and calm turmoil in the global market.
  • The Bank of Canada lowered as expected its interest-rate target 25 basis points to 4.0%, the second reduction in as many months, and signaled it will act again if the Canadian economy weakens.


  • The British manufacturing has proved resilient in Q4 2007, with export orders growing even faster than they did earlier in the year, the CBI’s latest industrial trends survey showed.
  • European Central Bank council member Vítor Constncio said the US economic slowdown will affect growth in Europe. The probability of a severe slowdown, or even a recession, has increased in the US, Constncio said. There will be consequences of course. We will not be immune to what will happen in the US economy. Meanwhile, fellow ECB member Jürgen Stark said the EMU economy is fundamentally sound. While we must expect a significant slowing of growth in the US, markets are perhaps reacting over-sensitively, Stark said.


  • The Bank of Japan kept its benchmark interest rate at 0.5%. BOJ Governor Toshihiko Fukui said the BOJ will raise interest rates gradually as long as the Japanese economy expands but said the policy board is at a delicate stage and the BOJ needs to be forward-looking. I know that market players think the outlook on [global] monetary policy is in a rate-cut direction, and there’s talk that Japan also may cut rates….Given the uncertain economic and financial background, we may be in a delicate stage of judging the outlook for the economy and prices, Fukui said.

FX Strategy Update