The euro extended recent gains vis-a-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4130 level and was supported around the $1.4085 level. The pair established a new lifetime high before consolidating some intraday gains. The move higher in the common currency was partially fueled by expectations the Federal Open Market Committee will reduce interest rates at least another 25bps before the end of the year. Traders await remarks from Federal Reserve Chairman Bernanke later in the North American session to see if he offers any additional clues about the Fed’s current thinking that were not detailed in the FOMC’s policy statement last week or in his subsequent Congressional testimony. Hong Kong Monetary Authority Chief Executive Joseph Yam warned that the U.S. dollar’s weakness may force Asian central banks to reassess their foreign exchange reserves management policies. Dallas Fed President Fisher indicated the Fed would have risked “unacceptably slow economic growth” if it didn’t cut rates last week and pledged the Fed is prepared to make a “further correction” towards growth or inflation. Data to be released in the U.S. this week include consumer confidence tomorrow and existing home sales. In eurozone news, the Belgian National Bank’s September business confidence index receded to 1.5 from 3.3 in August. Data to be released in the eurozone this week include the German Ifo business confidence index. Other data released today saw EMU-13 industrial orders fall 4.0% m/m in July and climb 10.9% y/y. Traders await comments on Wednesday from European Central Bank President Trichet to see if he offers any indication the ECB is prepared to lower interest rates before the end of the year. The other major question on traders’ minds is how the ECB will react to the relative strength of the euro. ECB member Noyer reported “Any abrupt changes in the dollar's value could seriously hamper economic growth. I regard it as extremely positive in this context that the US authorities are always sticking to and continue to stick to their strong dollar policy.” Euro bids are cited around the US$ 1.3990 level.

The yen appreciated vis-a-vis the U.S. dollar today as the greenback tested bids around the 114.75 level and was capped around the 115.40 level. Technically, today’s intraday low was right around the 61.8% retracement of the move from 109.00 to 124.15. Traders are talking about the shakeup in the leadership of the Liberal Democratic Party as Yasuo Fukuda will be named the country’s new Prime Minister tomorrow and is expected to place moderates in key party posts. The big questions on traders’ minds is whether Fukuda will promote economic and financial reforms, whether his Ministry of Finance officials will do anything to hasten the unwinding of the short yen carry trade, and how his government will get along with Bank of Japan officials. The Nikkei 225 stock index lost 0.62% to close at 16,312.61. Dollar bids are cited around the 114.55 level. The euro came off vis-a-vis the yen as the single currency tested bids around the ?161.80 level and was capped around the ?162.65 level. The British pound and Swiss franc came off vis-a-vis the yen as the crosses tested bids around the ?232.15 and 97.80 levels, respectively. The Chinese yuan depreciated vis-a-vis the U.S. dollar as the greenback closed at CNY 7.5106 in the over-the-counter market, down from CNY 7.5036. Merrill Lynch now estimates inflation will peak between 6.5% and 7.0% in the September to October period.

The British appreciated vis-a-vis the U.S. dollar today as cable tested offers around the US$ 2.0315 level and was supported around the $2.0195 level. Technically, today’s intraday high was just above the 23.6% retracement of the move from $1.9180 to $2.0655. Bank of England’s quarterly bulletin reported “A broad deterioration of conditions across credit markets was associated with increased volatility and impaired liquidity in global financial markets more generally in the review period.” Notably, the three-month sterling Libor market interest rate fell to 6.36% from 6.37% on Friday while the overnight rate rose to 5.80% from 5.75%. Data released in the U.K. today saw August public sector net borrowing print at 9.1 billion, the highest level since 1993 and a reflection of the credit market turmoil. Cable bids are cited around the US$ 2.0150 level. The euro slumped vis-a-vis the British pound as the single currency tested bids around the ?0.6950 level and was capped around the ?0.6975 level.

The Swiss franc came off marginally vis-a-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1755 level and was supported around the CHF 1.1685 level. The August UBS consumption indicator will be released tomorrow. U.S. dollar offers are cited around the CHF 1.1880 level. The euro and British pound gained ground vis-a-vis the Swiss franc as the crosses tested offers around the CHF 1.6550 and CHF 2.3760 levels, respectively.