• The dollar fell against most key currencies on Thursday after Federal Reserve Chairman Ben S. Bernanke said more interest-rate cuts may be required to bolster economic growth. The European Central Bank left its key interest rate unchanged at 4.0%, as expected. The Bank of England held interest rates steady at 5.5%. Sterling was little changed versus the dollar but lower against the euro after the ECB and BOE rate decisions. The yen declined against most major currencies as US stocks rose. The Australian dollar rose on the Reserve Bank of Australia’s rate hike speculations while the Canadian dollar was pressured by weak Canadian building permits.
  • The EUR/USD rose after Bernanke said additional policy easing may be necessary to offset downside risks to US growth while Trichet maintained a relatively hawkish tone and saw risks to both higher inflation and lower economic growth. The pair is testing resistance at 1.48. If this is broken, the pair will rally to a new high.


Financial and Economic News and Comments

US & Canada

  • Federal Reserve Chairman Ben S. Bernanke said lower interest rates may be required in light of the recent changes in the outlook for and the risks to growth. He said: We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.
  • US initial jobless claims unexpectedly fell 15,000 to 322,000, a two-month low, in the week ended January 5. The four-week average of continuing claims rose for an 11th straight week to its highest level since November 2005, the Labor Department said. The four-week average of new claims declined 3,000 to 341,000. Claims for the week ended December 29 were revised to 337,000 from 336,000. The latest data suggest some improvement in the US labor market in the beginning of 2008 despite volatile week-to-week data.


  • The value of Canadian building permits declined a stronger-than-expected 9.9% to C$6.03 billion ($5.99 billion), Statistics Canada reported.


  • The European Central Bank left its key interest rate unchanged at 4.0%, as expected. Meanwhile, the Bank of England held interest rates steady at 5.5%; the rate decision was expected to be a close call and the BOE is waiting to see the effects of its last-month rate cut. We think the BOE will lower rates next month.
  • European Central Bank President Jean-Claude Trichet said near-term data suggest upward inflation risk and that the ECB is prepared to act preemptively so that second-round effects and risks to price stability do not materialize. He also said economic fundamentals are sound, but the risk to the outlook for growth is to the downside. The council had discussed the pros and cons of the possibility of increasing rates and not increasing rates. He did not mention any discussion of lowering rates, nor did he mention the word vigilance, which is code for raising rates at the next meeting. We expect the ECB to keep rates unchanged at the next meeting, but the chance of lowering rates may be greater than the chance of hiking rates.


  • The Australian trade deficit narrowed to A$2.25 billion ($1.98 billion) in November from a revised A$2.86 billion in October, the Bureau of Statistics said. Exports rose 6% to A$18.38 billion and imports rose 2% to A$20.63 billion in November.
  • Japan’s leading economic index fell to 10.0 in November, the Cabinet Office said.
  • Bank of Japan Deputy Governor Toshiro Muto said he expects the Japanese economy to keep slowing for the time being and the BOJ will conduct policy with discretion. The cycle of rising corporate profits feeding into wages and consumer spending is losing momentum, he added.

FX Strategy Update