• The dollar touched record lows against the euro and Swiss franc and hit its lowest level since 1995 against the yen after the Federal Reserve cut the discount rate and opened its discount window to primary dealers in an emergency move. Bear Stearns was sold at a much lower-than-expected price to JPMorgan Chase increasing speculation that other leading US financial institutions may be in trouble. However, the greenback rebounded later in the session as risk-averse investors reduced the exposure to high-yielding currencies and parked their funds in dollar short-term assets. The dollar block currencies were also pressured by falling commodity prices. Sterling traded lower as the Bank of England added liquidity to the market.
  • The EUR/USD reached a new all-time high after Bear Stearns became the latest victim of the ongoing deleveraging process, before paring gains as US stocks stabilized. The Fed is meeting tomorrow, likely to lower the Fed funds rate by 75 basis points. This will increase interest rate advantage for the European economy. There are talks about coordinated intervention in support of the dollar to prevent a dollar freefall. However, IMF Managing Director Dominique Strauss-Kahn stated that despite a high risk of contagion from the liquidity crisis, there is no need for central banks to intervene in FX markets.


Financial and Economic News and Comments

US & Canada

  • The Federal Reserve cut its discount rate to 3.25% from 3.50% before its regular meeting tomorrow. The Fed also created a lending facility for big investment banks to secure short-term loans, a measure not used since the Great Depression of the 1930s. These steps will provide financial institutions with greater assurance of access to funds, Fed Chairman Ben S. Bernanke said.
  • Bears Stearns, an US investment bank, was bought by rival JPMorgan Chase for just $2 a share, far below Friday's close above $30 a share. The Fed will lend to the 20 investment banks that buy Treasury securities directly from it and will provide up to $30 billion to JP Morgan Chase to help it finance the purchase of Bear Stearns.
  • US industrial production fell a larger-than-expected 0.5% m/m in February after increasing 0.1% m/m in January, the Federal Reserve said. Capacity utilization fell to 80.9% in February after 81.5% in January. Industrial production increased 1.0% y/y, while capacity utilization rose 1.8% y/y.


  • The New York Fed's manufacturing index fell more than expected to -22.23 in March, from -11.72 in February, below the record low of -19.6 set in November 2001, the New York Fed said. However, new orders improved slightly to -4.69 in March from -11.88 in February. The employment number also improved, rising to 4.49 in March, from -2.11 in February.
  • The US current account deficit decreased to $172.9 billion in Q4 2007 (4.9% of GDP) from a revised $177.4 billion in Q3 2007, the Commerce Department said. The Q3 deficit was originally reported as $178.5 billion. The deficit fell to $738.6 billion in 2007, down from $811.5 billion in 2006.


  • The Bank of England offered ? billion ($10.11 billion) of three-day of extraordinary funding today to help bring down overnight interest rates. UK overnight interest rates spiked to around 5.8% earlier this morning, far above the BOE's 5.25% policy rate. The bank will take actions to ensure that the overnight rate is close to bank rate. Along with other central banks, the Bank of England is closely monitoring market conditions.


  • The Bank of Japan injected ?00 billion, after its overnight rate rose above the BOJ's 0.50% target, following the Fed's emergency measures.

FX Strategy Update