* The dollar traded mixed on more gloomy US economic news on Wednesday. US retail sales fell much more than expected and the Fed's Beige Book said most Fed districts experienced reduced or low economic activity. The yen advanced against most major currencies but did not make new highs despite plunging US stock prices. The yen is, as the stock market, close to important technical levels. If these are broken, we are likely to see both lower stock prices and further yen appreciation. The euro traded little changed, above the important 1.30 area support, ahead of Thursday's expected 50 basis-point European Central Bank interest-rate cut. Sterling rose after finding support at the 1.45 level. The Australian and Canadian dollars fell to the lowest levels in a month, pressured by lower commodity prices and investors seeking safe haven in the US dollar against the deteriorating global economy.

* The EUR/GBP fell ahead of tomorrow's ECB policy meeting. The pair surged at the end of last year but retraced about 50% of the gain until it found support from the uptrend. Today's decline came after Germany's statistical office warned that Germany's GDP may have contracted as much as 2% in Q4 2008. Despite this year's sharp decline, the EUR/GBP is in a strong uptrend. Until this diagonal support is broken we expect the pair to move higher.


Financial and Economic News and Comments

US & Canada

*US retail sales fell a more-than-expected 2.7% m/m in December, after November's 1.6% m/m decline, Commerce data showed. Retail sales excluding autos declined a more-than-expected 3.1% m/m. Retail sales were down 9.8% y/y and down 6.7% y/y excluding autos, both record declines since the late 1960s. Gas station sales accounted for more than half the fall in total retail sales, but almost every key component of retail sales also fell in December. Sales excluding autos, building materials, and gas fell 1.4% m/m in December, the largest drop since September 2001. These sales declined 0.6% y/y.


* US import prices fell in December for a fifth straight month, declining a less-than-expected 4.2% m/m, following November's downwardly revised 7.0% m/m drop, Labor Department data showed. Import prices dropped 9.3% y/y, the largest year-over-year decline since records began in 1982. All imports excluding petroleum declined 1.1% m/m but increased 0.9% y/y.


* US business inventories fell for a third consecutive month in November, declining fell a more-than-expected 0.7% m/m, following October's 0.6% m/m decline, Commerce Department data showed. Sales decreased 5.1% m/m, the most since recordkeeping started in 1992.

* The US economy deteriorated further in the past month across almost all regions, hurt by a lack of credit and declines in retail sales, according to the Federal Reserve Beige Book. Most districts noted reduced or low activity across a wide range of industries, the Fed said. Overall economic activity continued to weaken across almost all regions, the report said. Today's Beige Book underscores the picture of an economic downturn that may be the longest since the 1930s.


* Eurozone industrial production declined 1.6% m/m in November, mirroring October's contraction, Eurostat data showed. Industrial production fell a more-than-expected 7.7% y/y in weighted daily average terms in November, its sharpest decline since December 1990, following October's downwardly revised 5.7% y/y decline.


* The German economy probably contracted between 1.5% q/q and 2.0% q/q in Q4 2008, said Norbert Raeth, an economist at the Federal Statistics Office. A 2.0% contraction would be the worst quarterly contraction since German reunification in 1990 and the most for West Germany since Q1 1987.

* UK Prime Minister Gordon Brown pledged to guarantee £21.3 billion ($31 billion) of loans to companies in order contain the UK recession.


* Japan's machine orders fell a more-than-expected 16.2% m/m in November, following October's 4.4% m/m decline, data from the Cabinet Office's Economic and Social Research Institute showed. Machine orders plunged 27.7% y/y. The figures indicate a grim outlook for the Japanese industrial sector.

*China's economy overtook Germany's in 2007 as the world's third largest, with Chinese GDP growth of 13% y/y, more than a previous estimate of 11.9%, to 25.731 trillion yuan ($3.38 trillion), the statistics bureau said. That topped Germany's €2.424 trillion ($3.32 trillion), using average exchange rates for 2007.

* The Bank of Thailand cut its one-day bond repurchase rate to 2.00% from 2.75%.