Foreign Exchange Market Daily Update

The US dollar rose sharply to three month highs against the yen and rebounded from a record low versus the euro after the Federal Reserve announced it will inject liquidity into the financial system, easing the market’s anxiety over a deepening credit crisis and US recession. The Fed said it will hold auctions to lend as much as $200 billion in Treasuries and increase swap lines with the European Central Bank and the Swiss National Bank. Central banks coordinating actions to address the liquidity issue in the market is helping to stabilize the markets and aiding the US dollar recovery. As a result, the Dow Jones gained over 2.0% this morning and traders trimmed bets the Fed will slash its benchmark rate as much as 75 basis points this month.

The euro weakened against the US dollar after hitting record highs overnight, as traders speculated the steps will help ease a credit crisis that is threatening to tip the U.S. economy into a recession. The euro rose to a record against the dollar earlier after an industry report showed investor confidence in Germany unexpectedly improved this month, adding to evidence Europe's largest economy may weather a U.S. slowdown.

Sterling fell from three-month highs after a UK house price measure fell to its lowest since the market crashed in 1990, supporting the case for further interest rate cuts. In other news this morning, separate data from the British Retail Consortium showed retail sales growing at a modest pace last month, as consumer spending tightened, adding more pressure to the British pound.

The Japanese yen fell over 1.4% versus the US dollar as central banks synchronized efforts to assist global liquidity issues. However, the yen will continue to remain firm and the Nikkei 225 index rose 1.0% overnight.

The Canadian dollar gained against the greenback supported by record oil prices, strong domestic data, and a coordinated move by central banks to help ease credit strains. The Bank of Canada said it was ready to pump CAD $4 billion into the market and domestic data showed Canada’s trade surplus widened in January on a surge in exports.

The Australian and New Zealand dollars remain buoyant, reinforced by rising commodity prices and improved appetite for riskier assets and higher-yielding currencies.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group