Foreign Exchange Market Daily Update

The US dollar weakened against a basket of currencies. The Chicago Purchasing Managers Data came in at 44.5 versus the expected 50 for February, which is the worst since December 2001. With expectations of aggressive rate cuts to come, the dollar came under pressure as concerns over the health of the US economy was highlighted. Yesterday's surprising increase in US jobless claims and affirmation that the world's biggest economy barely grew in the final quarter of 2007 fueled worries of recession. At the next FOMC meeting in March, markets are now pricing in a 50 basis point rate cut, and giving a more than 1-in-3 chance of a 75-basis point rate cut.

The Euro continues to maintain its strength against the dollar, even after euro-zone economic sentiment deteriorated. A data showed euro-zone economic sentiment decreased to 100.1 in February from 101.7 in January, which was a slightly steeper fall than the forecasted decline to 101.2.

The British pound weakened slightly against the dollar, as sagging consumer sentiment and falling house prices boosted expectation for the Bank of England to cut rates in the near future. A survey showed British consumer morale fell to its lowest in more than 13 years in February and Nationwide Building Society reported that British house prices fell for the fourth month running in February. With economic concerns looming over the UK, the market is pricing in a 50-50 chance BoE will cut rates by June.

The Japanese yen hit a three-year high against the dollar, as Japanese data showed a surprising increase in consumer spending. Bernanke's warning on the health of small US banks on Thursday, coupled with economic woes, brought carry trades to the forefront as investor risk appetite was whetted.

The Canadian dollar strengthened against the US dollar after Bernanke's comments on Thursday that some smaller US banks may fail due to housing slumps and unemployment may increase. The loonie maintained its strength against the greenback even after a report showed Canada's international trade fell into deficit for the first time since 1999 in the 4th quarter.

The Australian and New Zealand dollars maintained its strength over the US dollar. As commodity prices climb, analysts are now saying the Aussie dollar may soon rise to equal the US dollar in value. Analysts speculate that the Reserve Bank of Australia will probably raise its interest rates at their next meeting on March 4th to curb inflation.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group