The euro appreciated vis-a-vis the U.S. dollar last week as the single currency tested offers around the $1.4120 level and was supported around the $1.3825 level. The pair gained about 210 pips last week. The common currency eclipsed the psychologically-important US$ 1.40 figure for the first time ever. The FOMC reduced the federal funds target rate by a surprise 50bps to 4.75% and lowered the discount rate by 50bps. The Fed cited the effect of “tightening credit conditions” on the housing market and economic growth. U.S. Treasury’s Paulson said the markets will continue to reprice risk “for a while” but added they are doing so against the backdrop “of a strong global economy.” Fannie Mae and Freddie Mac were given the capacity to invest US$ 20 billion in subprime mortgages. Rumours of a Saudi rial decoupling from the U.S. dollar has spread concern the region could reduce U.S. dollar holdings. Bernanke pledged regulators would limit mortgage fallout while Kohn said the Fed’s cuts were responsive to the decline in house prices and advocated an inflation target.
ECB’s Liebscher reiterated inflationary risks “are on the upside” and ECB’s Weber warned of inflationary pressures in Germany. ECB’s Bing Smaghi talked the euro down while ECB’s Constancio hinted rates could move lower.
Data released in the U.S. last week saw the September Empire State manufacturing index fall to 14.7; the August producer price index fell 1.4% m/m with core prices up 0.2%; August core PPI was up 2.2%; foreign demand for long-term U.S. securities fell to US$ 19.2 billion in July from a revised US$ 97.3 billion; total net foreign capital inflows were at US$ 103.8 billion from US$ 34.4 billion in June; August house foreclosure filings doubled y/y and were up 36% m/m; August headline CPI was off 0.1% with core CPI up 0.2%; core inflation is now up 2.1% over the past twelve months; August housing starts were off 2.6% to 1.331 million units; weekly initial jobless claims were off 9,000 to 311,000; continuing jobless claims were off 53,000 to 2.544 million; and the Philadelphia Fed manufacturing survey improved to 10.9.
Data released in the eurozone last week saw the EMU-13 July trade surplus printed at €4.6 billion from a revised €7.6 billion in June; the September ZEW economic expectations index fell sharply to -18.1 from -6.9 in August; German August PPI was up 0.1% m/m and 1.0% y/y; the Belgian National Bank’s September consumer confidence indicator was unchanged at +2; the flash EMU-13 September manufacturing PMI index fell to 53.2; the EMU-13 September services PMI fell to 54.0; and the EMU-13 current account surplus receded to €1.7 billion.

The yen depreciated vis-a-vis the U.S. dollar last week as the greenback tested offers around the ?116.35 level and was supported around the ?114.00 figure. The pair gained about 5 pips last week. The Nikkei 225 stock index closed the week at ?16,312.61. This Sunday’s LDP presidential election will pit Fukuda against Aso with the former seen as the front-runner to become Japan’s next Prime Minister. BoJ’s Policy Board kept the overnight call rate unchanged at 0.50% and Fukui weighed the “expansion of the Japanese economy” against global market turmoil. MoF’s Shinohara reported FX volatility “is still high.”
Data released in Japan last week saw the July tertiary index fall 0.5% m/m; August department store sales rise 1.4% y/y; the July leading index was upwardly revised to 72.7; the government’s large companies’ business sentiment diffusion index rebounded to +6.2 in Q3; and the July all-industries index was of 0.4% m/m and up 1.2% y/y.
The Chinese yuan appreciated vis-a-vis the U.S. dollar last week as the greenback closed at CNY 7.5036 in the over-the-counter market, down from CNY 7.5175. Credit Suisse predicted China will tighten monetary policy further this year. The European Union said China’s FX reforms have not had any impact on the EUR/ CNY exchange rate. The government sees 2007 retail sales up 15%. PBOC reported household satisfaction with consumer prices is at a record low. PBOC chief Zhou said there is “no timetable” to make the yuan fully convertible.
Data released in China last week saw the Q3 entrepreneur confidence index recede to 77% from 83.4% in Q2.

The British pound appreciated vis-a-vis the U.S. dollar last week as cable tested offers around the US$ 2.0215 level and was supported around the $1.9880 level. The pair gained about 135 pips last week. Sterling was given earlier in the week as a result of panic withdrawals at home lender Northern Rock amid insolvency concerns. Bank of England provided billions in repo liquidity and guaranteed banking deposits across the industry to calm the Northern Rock stormy waters. CBI lowered its 2008 U.K. GDP forecast to 2.2% from 2.4%. BoE MPC meeting minutes saw a 9-to-0 vote to keep rates unchanged this month and many traders believe the BoE will lower rates this year. BoE’s King said existing legislation prevents the BoE from handling banking crises in a preferred manner. Liquidity conditions continued to normalize at the end of the week with three-month sterling Libor finished at 6.37%.
Data released in the U.K. last week saw the August headline CPI fall to 1.8%, its lowest rate since February 2005; August retail sales were up 0.6% m/m; CBI’s output balance was up +17%; the August provisional M4 money supply was up 13.5%; August mortgage lending fell to ?32.2 billion; and IRS pay deals were steady at 3.5% in the three months to the end of August.

The Swiss franc appreciated vis-a-vis the U.S. dollar last week as the greenback tested bids around the CHF 1.1675 level and was capped around the CHF 1.1900 figure. The pair lost about 175 pips last week. SNB’s Roth suggested Swiss interest rates may have peaked.
Data released in Switzerland last week saw Q2 industrial production was up 6.7% q/q and 9.8% y/y; July retail sales were up 3.3% y/y; August producer and import prices were up 0.3% m/m and 2.7% y/y; the August trade surplus widened to CHF 637.1 million; and the economic expectations indicator fell to -26.7 in September.

The Canadian dollar appreciated vis-a-vis the U.S. dollar last week as the greenback tested bids around the C$ 0.9935 level and was capped around the C$ 1.0310 level. The pair lost about 295 pips last week. The pair reached parity for the first time since November 1976.
Data released in Canada last week saw foreigners buy a net C$ 1.5 billion in Canadian securities in July while Canadian investors reduced their investments in foreign securities to a net C$ 3.56 billion; August CPI was up 1.7% y/y; August leading indicators were up 0.3%; July wholesale sales were up 2.0% m/m; July wholesale inventories were up 0.6%; and July retail sales were off 0.8% m/m with the ex-autos component off 0.3%.

The Australian dollar appreciated vis-a-vis the U.S. dollar last week as the Aussie tested offers around the US$ 0.8700 figure and was supported around the US$ 0.8275 level. The pair gained about 240 pips last week. RBA Governor Stevens called on banks to disclose their exposure to the U.S. subprime mortgage crisis more fully.
Data released last week saw the August merchandise imports rose to A$ 16.924 billion; the July leading economic index was up +4.6%; and August new home sales fell 8.6% m/m.