•    Dollar Quietly Rallies Ahead of Next Week’s Fed Meeting
•    Pound Slides as Market Thinks Treasury is Too Optimistic
•    Tanigaki Confirms There is No Need to Worry About Yen Movements

US Dollar
The dollar quietly gained strength today as the market traded with little direction.  Consumer credit, which barely causes a quiver for the greenback, still failed to do so even though it came out far off expectations. Expected to increase by $5.0 billion, consumer borrowing actually fell a record $7.2 billion, dragged lower by a drop in automobile financing.  Gradually, we are beginning to see more signs of a clear slowdown in the housing market.  It was only yesterday that pending home sales took a 3.2 percent tumble. Meanwhile, what did catch our eye today was the Challenger layoffs report, which indicated that layoffs increased 22 percent in the month of November, marking the index’s third consecutive rise.  The action today was really in the other markets.  Gold prices rose to a 24 year high and are in effect, becoming its own currency, with its own fundamentals.  Traditionally, gold prices have had a strong inverse relationship with the US dollar.  These days, the relationship between the two has decoupled significantly, as fund managers look for more ways to diversify their portfolios.  Meanwhile, in a letter to a Congressman about policy neutrality, Greenspan skirted the issue of putting a number on the neutral rate.  He said that it is difficult to estimate and targeting it is not completely reliable.  On a broader scope, the dollar is benefiting modestly from the retracement in oil prices and is already looking ahead to next week’s interest rate hike.  We will continue to look for subtle changes to the FOMC statement, especially since the last minutes released suggested that even though there will be nothing stopping the Fed from raising rates for the thirteenth time to 4.25 percent, the central bank feels that the wording in their statement needs to be changed eventually.  Policy accommodation cannot continue being removed at a measured pace forever.  

Like the US, the Eurozone economic calendar was as empty as a desert field.  There were not even any noteworthy comments from the ECB or other government officials. The IMF spent some time calling for faster growth in Germany.  We believe that this is what Germany wants as well, but with high unemployment and tough labor laws preventing companies from letting unproductive employees go, Germany and France have found themselves trapped in time, unable to match the quick pace of productivity seen in the US as well as Asia. Range trading has remained the predominant theme in the EURUSD for three weeks now as the market mulls over the pending fate of the currency pair.  For the first three weeks of December last year, we were very much stuck in the same sort of trading environment that we are today.  It was not until the last week of December that the currency pair really broke out to hit an all time high of 1.3631 before the New Year.  With a fairly busy global calendar next week, there is still hope for a breakout move.  Alternatively, big moves and trend continuations are still happening in the crosses.

British Pound
The British pound took a tumble today on word that the growth forecasts released by the Treasury yesterday may have been too optimistic.  According to reports, growth should probably be more like 1.75 percent than the 2.75 to 3.75 percent touted by the Treasury yesterday.  The Bank of England to slated to meet and decide on monetary policy tomorrow.  It is pretty much a consensus that the central bank will be leaving interest rates on hold once again 4.50 percent.  With next week’s expected rate hike from the Fed, the UK’s yield advantage would shrink to a measly 25bp, from the far more lucrative 150 that we started the year at.  As the rate tips into the US’ favor, the pound could shed some of its recent gains.  Economic data has been so mixed that even if the BoE does not lower rates, the best they can do is to keep it unchanged.  The only glimmer of hope today was the stronger BRC shop price index report, which rebounded to 0.43 percent in the month of October from a -0.96 percent drop the previous month.  This is slightly encouraging given the index’s reflection of consumer spending habits.  

Japanese Yen
The dollar continued to hold on strongly against the Japanese Yen, or perhaps it is the other way around, that is the Yen traders have been resisting well to further losses.  Either way, the USDJPY currency pair is hovering near its 2.5 year highs.  Stronger Japanese leading economic indicators battled comments from Japanese Finance Minister Tanigaki.  With the leading economic index at 80 percent and the coincident index at 88.9 percent, we are seeing signs that the region’s recovery may still be underway.  Yet, the dabbling of the Prime Minister into monetary policy continues to concern traders.  For the first time this year, Prime Minister Koizumi held an official meeting with Bank of Japan Governor Fukui.  Even though Fukui said that they did not discuss the timing “of the end of quantitative easing,” traders remain doubtful that Koizumi would refrained from pressuring the BoJ to delay the removal of the country’s zero interest rate policy.  In terms of currency movements, Yen bears found comfort in Tanigaki’s reiteration that FX movements are still in line with fundamentals.