• The dollar traded mixed on Tuesday after the Federal Reserve cut its target interest-rate by 25 basis points to 4.25%. The greenback was lower versus the yen as the stock market sold off on the Fed's announcement but higher against most other major currencies. The less-aggressive-than-expected Fed action may increase the risk of a US recession and risk aversion as today's moderate rate cut, particularly in the discount rate, may not help much to lower credit market stress. This is positive for the yen and moderately positive for the dollar. The equity outlook remains important for the yen. Stock sell-offs are likely to continue; thus, we sell one unit of the USD/JPY.
  • The EUR/USD fell today. After having broken its 3-month uptrend, the pair is in a trading range between the 1.45-1.46-area support and the 1.48-1.49-area resistance. The pair seems in a topping process.


Financial and Economic News and Comments

US & Canada

  • The Federal Open Market Committee cut its benchmark interest rate by 25 basis points to 4.25% and the discount rate by 25 basis points to 4.75% to prevent the housing slump and credit squeeze from reducing economic growth. The change should help promote moderate growth over time, the FOMC said. The Fed acknowledges that the risk for a recession has increased. Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time.
  • US wholesale inventories were unchanged in October. Sales rose 0.7% m/m in October to leave a new record low inventory to sales ratio of 1.09 months.


  • Investor confidence in Germany dropped to a less-than-expected -37.2 in December, the lowest reading in 15 years, from -32.5 in November, the ZEW Center for European Economic Research said. The ZEW current economic situation gauge fell to a larger-than-expected 63.5 in December from 70 in November.


  • UK's trade deficit narrowed more than expected as imports fell. The goods trade gap was £7.1 billion ($14.5 billion) in October compared with a record £8 billion in September, the Office for National Statistics said. Exports rose 1.8% m/m and imports fell 1.9% m/m. The overall deficit for goods and services narrowed to £4.1 billion in October from £4.8 billion in September.


  • Japanese households became the most pessimistic in almost four years. A household confidence index dropped to 39.8 in November from 42.8 in October, the Cabinet Office said. The percentage of people expecting prices to rise jumped to a record 82.2%. The willingness to purchase durable goods fell to 38.4, the lowest since 1997, when the government raised the sales tax.
  • China's consumer prices inflation accelerated to a higher-than-expected 6.9% y/y in November, the highest in eleven years, the Statistics Bureau said. China's trade surplus rose 14.7% y/y to $26.3 billion in November, the third-biggest monthly total, the Customs Bureau said.
  • People's Bank of China Governor Zhou Xiaochuan said currency policy will be used to help narrow the trade gap. US Treasury Secretary Henry Paulson is in China trying to convince the Chinese to appreciate the yuan.

FX Strategy Update