Foreign Exchange Market Daily Update

The US dollar continues to weaken against a basket of currencies. Many investors worry that the US is falling into recession on the heels of subprime mortgage woes. Fed Chairman Ben Bernanke urged lenders to expand mortgage writedowns so borrowers whose home values have declined can steer clear of foreclosure. Citigroup announced that they may need more capital injection from outside investors as their losses stemming from the subprime mortgage market increases. In January, Citigroup announced it was getting another $14.5 billion from outside investors including the governments of Singapore and Kuwait. Bernanke predicts that foreclosures and delinquencies will increase in the months to come, which will continue to weigh heavily on the US dollar.

The Euro retained its strength against the dollar. On Monday, Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, ECB President Jean-Claude Trichet and the ministers discussed exchange rate policy and agreed to voice concerns over excessive moves. The euro zone policy makers pressured Washington to do more to halt the dollar's decline.

The British pound strengthened against the dollar even after a private report showed construction, which accounts for 6 % of Britain's economy, grew at its slowest pace in February. Traders pared bets on how far the BoE will cut interest rates this year which also added to the pound gain.

The Japanese yen strengthened against the dollar, as investors' concern over the US slipping into recession prompted carry trade to be brought to the forefront. In a carry trade, investors borrow from low-yielding currencies, such as the yen, to pare with a higher-yielding currency.

The Canadian dollar weakened against the US dollar after the Bank of Canada announced a 50 basis point rate cut to 3.50 %. This was the first time since November 2001 that the Bank of Canada cut rates. They signaled that further rate cuts may follow, as the slowing US economy wreaked damaging effects on the Canadian economy.

The Australian and New Zealand dollars weakened against the US dollar. The Reserve Bank of Australia raised rates by 25 basis point to a 12-year high of 7.25 %.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group