The US dollar began to strengthen against a basket of currencies in thin holiday trading as investors sold the European currency in recognition of data showing deepening recession in the euro zone. Despite dollar gains, manufacturing in the U.S. shrank in December to lowest levels since 1980 signaling a deepening recession. Liquidity remains thin during the holiday season with many market participants taking the day off; full liquidity will likely not return to the markets until next week at the soonest.
The euro weakened in morning trading as news of record lows in manufacturing activity in the euro zone was released for December 2008. The Eurozone PMI, reflecting contracting activity for the seventh month, settled to an unseen low of 33.9 last month. This data may mount pressure on the ECB to cut interest rates significantly further at its January 15th meeting.
The British pound continued to trade at 2 week lows against the dollar, dropping .75% in morning trading, following the release of weak UK data on lower housing prices, tighter credit and meager consumer spending. Financial markets anticipate the strong probability that the benchmark rate will fall 75 basis points to 1.25 percent. The BOE's Monetary Policy Committee will meet next week and reach a decision by Thursday.
The Japanese yen rose against the dollar after U.S. manufacturing data fell more than expected at the close of 2008.
The Canadian dollar remained in a tight trading pattern in holiday trading. Oil prices remain down, declining as much as 8%, impacting the loonie as crude accounts for around 10% of Canada's export revenue.
Both the Australian dollar and the New Zealand dollar rose this week against the Japanese yen as a flight towards safe haven currencies reverses and investor risk appetite increases, likely in response to interest-rate cuts in many major economies.
The Mexican peso weakened against the US dollar after reports that the US economy continues to weaken, Mexico's biggest trading partner. The peso slid 20 percent last year in response to weakening global trade and decreased demand for Mexican exports.