The euro appreciated sharply vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.6040 level and was supported around the $1.5880 level. Today’s intraday high represents a new lifetime high and the move higher was precipitated by growing concerns about the health of the U.S. banking sector. Traders are concerned that the failure of IndyMac Bank and bailouts of Fannie Mae and Freddie Mac represent the first financial institutions that are in immediate trouble. Data released in the U.S. today saw June headline producer price inflation climb +1.8% m/m and 9.2% y/y while the core rate was up +0.2% m/m and +3.0% y/y. Also, June advance retail sales were up +0.1% on the headline and +0.8% on the ex-transportation level. Federal Reserve Chairman Bernanke testified before the Senate today and said there is a “critical” need to keep inflation expectations in check. He added the U.S. economy is expanding a bit faster than expected and should avoid a technical recession. Bernanke noted the “top priority” of the Fed is to keep financial markets functioning and said there is a “high degree of uncertainty” with regard to his outlook for higher economic growth and lower inflation. The Fed sees 2008 GDP growth of 1.0% to 1.6% and core inflation excluding food and energy at 2.2% to 2.4%. President Bush also addressed the state of the U.S.’s economy today and indicated the U.S. must do what it can to increase the supply of crude oil. Other data released in the U.S. today saw the July Empire State manufacturing index improve to -4.98 from -8.68 in June while May business inventories were up 0.3%. In eurozone news, the German August ZEW economic expectations index fell to -63.9 from -52.4 in July, its lowest level since December 1991. Euro bids are cited around the $1.5645/ $1.5230 levels.

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥104.55 level and was capped around the ¥106.25 level. Stops were hit below the ¥104.95 level, representing the 61.8% retracement of the move from ¥102.65 to ¥108.55. As expected, Bank of Japan’s Policy Board kept its overnight call rate unchanged at 0.50% and is expected to keep borrowing costs unchanged for several months. The central banks also downgraded its economic assessment on account of escalating energy and material prices. BoJ Governor Shirakawa reported “economic growth is slowing further” and added policymakers “will implement monetary policy flexibly.” The BoJ also released a new set of forecasts on economic growth and the economy with officials cutting their GDP growth forecast to 1.2% to 1.5% for the current fiscal year. Similarly, they raised their core CPI growth forecast to 1.8% from 1.1%. The central bank also announced plans to enhance communications with the market by broadening its semi-annual economic and price forecasts in April and October and expanding the interim reviews in January and July. Moreover, the central bank will begin issuing a statement after every rate announcement and today indicated “economic growth is slowing further, reflecting weaker growth in business fixed investment and private consumption against the backdrop of high energy and material prices.” Finance minister Nukaga reported the government will seek a 3% decrease in public works budgetary spending for the next fiscal year that begins in April 2009. The Nikkei 225 stock index lost 1.96% to close at ¥12,754.56. Dollar bids are cited around the ¥103.65 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥167.05 level and was capped around the ¥168.95 level. The British pound and Swiss franc weakened vis-à-vis the yen as the crosses tested bids around the ¥210.05 and ¥104.00 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8221 in the over-the-counter market, its weakest close since the yuan revaluation of July 2005.

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 2.0155 level and was supported around the $1.9930 level. Technically, today’s intraday high was right around the 76.4% retracement of the move from $2.0395 to $1.9335. Data released in the U.K. today saw the June annualized consumer price inflation rate jump to 3.8% from 3.3%, above expectations and its highest level in sixteen years. These data add to the view that Bank of England’s Monetary Policy Committee will be unable to reduce its main repo rate this year. Other data released overnight saw the RICS June monthly house price survey confirm that 88.0% of its respondents saw falling house prices while BRC reported June retail sales fell. Cable bids are cited around the US$ 1.9870/ 1.9360 levels. The euro weakened vis-à-vis the British pound as the single currency tested bids around the ₤0.7935 level and was capped around the ₤0.7985 level.

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0010 level and was capped around the CHF 1.0175 level. Technically, today’s intraday low was right around the 61.8% retracement of the move from CHF 0.9645 to CHF 1.0625. U.S. dollar offers are cited around the CHF 1.0395 level. The euro and British pound came off vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.6030 and CHF 2.0120 levels, respectively.