• The dollar rallied against the yen but fell against the high-yielding currencies and euro on Wednesday after the Federal Reserve and other major central banks announced new facilities to try to unclog the international money market. The yen fell as risk appetite increased on the central banks’ new measures to deal with liquidity problems. The Canadian dollar and Swiss franc were little changed.

  • The USD/JPY rallied after the Fed announced it will inject cash to banks up to $40 billion in two auctions this month and will provide $24 billion in currency swap lines to the European central banks in an effort to ease the credit squeeze by encouraging short-term lending among financial institutions. The pair has rallied since making a low of 107 in November. The long-term trend is still negative. There are support in the 110-area and resistance in the 113-114 area.

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Financial and Economic News and Comments

US & Canada

  • The Federal Reserve and other key central banks moved in concert to alleviate the credit squeeze threatening the global economic expansion. The Fed stated it will make up to $24 billion available to the European Central Bank and Swiss National Bank to increase the supply of dollars in Europe. The Fed also plans four auctions, including two this month that will add as much as $40 billion, to increase cash in the US.

  • The measures are designed to address elevated pressures in short-term funding markets, the Fed said. It is considering setting up a permanent arrangement to provide funds to banks through term auction facility operations. Commercial banks have been unwilling to lend to each other after the subprime mortgage debacle has increased banks’ credit risk. The measures are likely to lower credit spreads in the money market. In addition, the FOMC authorized temporary reciprocal currency arrangements, or swap lines, for up to six months, with the ECB of as much as $20 billion and $4 billion to the SNB for use in their jurisdictions.

  • The plan is more comprehensive than regular central banks’ operations and a lowering of the discount rate. These operations are open to thousands of banks rather than the primary dealers involved with the daily Fed operations and there should be no stigma against these operations as is the case with discount borrowing. In addition, it addresses the international ramifications of the liquidity squeeze.

  • The US deficit in international trade of goods and services rose 1.2% to $57.82 billion in October from September’s revised $57.12 billion, the Commerce Department said. In October, exports increased 0.9% to $141.68 billion and imports rose 1.0% to $199.51 billion. The US trade deficit with China rose to $25.93 billion in October from September’s $23.77 billion.


  • UK's jobless claims fell a more-than-forecast 11,100 in November to 813,000, the lowest since 1975, the Office for National Statistics said. The unemployment rate fell to 5.3% in November from 5.4% in October.


  • Australia's consumer confidence rose 1.8% in December for the first month in three. The sentiment index stood at 112.5, according to a Westpac Banking Corp. and Melbourne Institute survey.

  • Japan's wholesale prices rose a stronger-than-expected 2.3% y/y in November after increasing 2.0% y/y in October, the Bank of Japan said.

FX Strategy Update