The euro extended recent gains vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4705… … level and was supported around the $1.4615 level.

The common currency recovered from earlier intraday weakness after Federal Reserve Chairman Bernanke warned the U.S. economy would likely decelerate in Q4 and expand below its long-term growth rate in H1 2008. On the inflation front, Bernanke added oil prices are increasing the risks of inflation and noted the Fed would not hesitate to adjust policy “as needed.” Notably, Bernanke also suggested the weaker U.S. dollar are other factors that are likely to increase overall inflation. Traders seem to be convinced the Fed is more concerned with the lower growth scenario at this stage compared with inflation as the December federal funds futures contract is now pricing in about a 93% chance the FOMC will reduce its overnight target rate by 25bps to 4.25% at its 11 December policy-setting meeting. Likewise, the market is pricing in about a 74% change the federal funds target rate will be lowered to 4% by the end of the FOMC’s two-day meeting at the end of January. Data released in the U.S. today saw weekly initial jobless claims fall 13,000 to 317,000 while continuing jobless claims fell 4,000 to 2.579 million. U.S. retailers have announced weak sales results for October and economists are downwardly revising their forecasts for holiday spending. In eurozone news, the European Central Bank kept its main refinancing rate unchanged at 4.00% as expected. ECB President Trichet was hawkish in his remarks and noted “The information available since our previous meeting fully confirms that the outlook for price stability over the medium term is subject to upside risks. Against this background, and with money and credit growth vigorous in the euro area, our monetary policy stands ready to counter upside risks to price stability as required by our mandate.” Trichet characterized recent exchange rate movements as “brutal and never welcome” and reiterated the U.S. continues to pursue a strong dollar policy. The European Commission announced it is “obviously concerned” with volatility in the euro and oil. Euro bids are cited around the US$ 1.4560 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥113.35 level and was supported around the ¥112.05 level. The pair earlier reached its lowest level since 17 August before retracing intraday losses. Data released in Japan overnight saw October bank lending 0.7% while the October money supply expanded +2.0%, up from +1.7% in September. Also, October orders for industrial machinery rose 9.9% y/y while core private-sector machinery orders were off 7.6% m/m. Additionally, the October economy watchers’ index fell for the seventh consecutive week with the current conditions index lower at 41.5 from 42.9 in September. The Nikkei 225 stock index lost 2.02% to close at ¥15,771.57. Dollar bids are cited around the ¥111.60 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥166.15 level and was supported around the ¥164.00 figure. The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥238.85 and ¥100.10 levels, respectively. The Chinese yuan appreciated sharply vis-à-vis the U.S. dollar as the greenback closed at CNY 7.4207 in the over-the-counter market, down from CNY 7.4421 and the pair’s lowest close since the July 2005 yuan revaluation. PBoC reported it sees 2007 GDP growth up more than 11% with CPI up 4.5%. China’s trade surplus registered US$ 185.65 billion in the first nine months of 2007.

₤

The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 2.1150 level and was supported around the $2.0970 level. Sterling established a new multi-decade high after Bank of England kept the repo rate unchanged at 5.75%, as expected. Traders believe today’s vote on interest rates was probably a close one as the market had been pricing in about a 25% change that rates would be trimmed. Data released in the U.K. today saw the September leading indicator fall 0.1% while Halifax October house prices fell 0.5% m/m and were up 8.9% y/y. Cable bids are cited around the US$ 2.0975 level. The euro weakened vis-à-vis the British pound as the single currency tested bids around the ₤0.6950 level and was capped around the ₤0.6980 level.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1250 level and was capped around the CHF 1.1345 level. The pair reached its lowest level since May 2005. Data released in Switzerland today saw the October unemployment rate print at 2.6%, up from 2.5% in September. Many traders believe Swiss National Bank will tighten monetary policy further in December. U.S. dollar offers are cited around the CHF 1.1410 level. The euro and British pound came off vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.6530 and CHF 2.3735 levels, respectively.

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