The euro came off vis-a-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3935 level and was capped around the $1.3985 level. Today’s range was limited following yesterday’s significant move higher that saw the common currency establish a new lifetime high and come within fifteen pips of testing the psychologically-important US$ 1.4000 figure. The impetus for the pair’s gains yesterday was a larger-than-expected interest rate reduction by the Federal Open Market Committee that saw the federal funds target rate lowered by 50bps to 4.75%. Most traders expected the FOMC to reduce rates by 25bps and many Fed-watchers are already anticipating policymakers will lower rates another 25bps this year. The FOMC reported “Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time. Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.” Equity markets reacted very positively to the Fed’s decision that also included a 50bps reduction in the discount rate. The Fed is clearly concerned about the impact of the subprime mortgage market crisis on the U.S. housing sector. Data released in the U.S. today saw August headline consumer price inflation off 0.1%, the first negative reading since October 2006. Core CPI prices were up 0.2% last month and core inflation is now up 2.1% over the past twelve months. These data are consistent with the Fed’s assessment that inflation is moderating. Other data released today saw August housing starts off 2.6% to 1.331 million units while permits for future construction were at their lowest levels in more than one decade. U.S. federal housing regulators provided the housing market with a little bit of a boost today in granting Fannie Mae and Freddie Mac with the capacity to invest US$ 20 billion in subprime mortgages. In eurozone news, the German government warned a weaker dollar could negatively impact German exports. Data released in Germany saw the August producer price index up 0.1% m/m and 1.0% y/y. Euro bids are cited around the US$ 1.3620 level.

The yen depreciated vis-a-vis the U.S. dollar today as the greenback tested offers around the ?116.30 level and was supported around the 115.65 level. Technically, today’s intraday high was right around the 38.2% retracement of the move from 122.15 to 111.60. As expected, Bank of Japan’s Policy Board voted 8-to-1 to keep the overnight call rate unchanged at +0.50%. The central bank also kept its economic assessment of the economy unchanged and most traders believe the BoJ may be forced to keep the overnight call rate unchanged through the end of 2007. BoJ Governor Fukui said instability in global financial markets and downside risks surrounding the U.S. economy countered “the steady expansion of the Japanese economy.” Data released in Japan overnight saw August department store sales rise 1.4% y/y while the July leading index was upwardly revised to 72.7. The Nikkei 225 stock index gained 3.67% to close at 16,381.54. Dollar bids are cited around the ?113.70 level. The euro came off vis-a-vis the yen as the single currency tested bids around the 161.35 level and was capped around the ?162.45 level. The British pound and Swiss franc weakened vis-a-vis the yen as the crosses tested bids around the 231.10 and ?97.80 levels, respectively. The Chinese yuan appreciated vis-a-vis the U.S. dollar as the greenback closed at CNY 7.5135 in the over-the-counter market, down from CNY 7.5228 – the pair’s weakest closing price since the revaluation in July 2005. The government now estimates 2007 retail sales will print around CNY 8.8 trillion, up 15%.

The British extended recent losses vis-a-vis the U.S. dollar today as cable tested bids around the US$ 1.9950 level and was capped around the $2.0170 level. Technically, today’s intraday high was just above the 50% retracement of the move from $2.0655 to $1.9650. Minutes from Bank of England Monetary Policy Committee’s September interest rate meeting were released today and evidenced a 9-to-0 vote to keep rates unchanged on account of turmoil in the credit market. The MPC also concluded the upside balance of risk to inflation it identified last month “had probably receded.” Bank of England today announced it will avail the support it has provided over the past week to Northern Rock PLC to other financial institutions. The central bank is trying bring the sterling money markets under control where the premium for short-term liquidity remains 100bps above the central bank’s repo rate target of 5.75%. Most traders now believe the BoE will be forced to reduce interest rates over the coming months. Cable bids are cited around the US$ 1.9805 level. The euro moved higher vis-a-vis the British pound as the single currency tested offers around the 0.6995 level and was supported around the 0.6930 level.

The Swiss franc depreciated vis-a-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1875 level and was supported around the CHF 1.1790 level. The pair reached its lowest level since April 2005 before being bid higher today. Data released in Switzerland today saw July retail sales rise 3.3% y/y, above expectations. Dollar offers are cited around the CHF 1.1960 level. The euro moved higher vis-a-vis the Swiss franc as the single currency tested offers around the CHF 1.6560 level while the British pound came off vis-a-vis the Swiss franc and tested bids around the CHF 2.3590 level.