Euro

The euro fell sharply vis-à-vis the U.S. dollar today (Tuesday) as the single currency tested bids around the US$ 1.4010 level and was capped around the $1.4430 level. Strong gains in U.S. equity markets pushed the common currency lower. U.S. legislators have yet to agree on a final bailout package for troubled U.S. financial institutions and many traders continue to believe a US$ 700 billion deal will be reached by Thursday. President Bush said the economy is at a “critical moment” and needs the legislation passed. U.S. interbank lending rates remain significantly elevated as the federal funds rate opened at 7.0% today, well above the Fed’s current 2.0% target rate. Similarly, the Libor rate on overnight U.S. dollar funds escalated a record 430 bps to 6.87%, the highest level in 7.5 years.

Data released in the U.S. today saw the July S&P Case-Shiller home price index off a record 16.3% y/y. Also, September consumer confidence improved to 59.8 and Kansas City Fed President Hoenig hawkishly said rates should be normalized as soon as it is feasible.

In eurozone news, the French government took a 25% stake in Dexia following a capital injection of €6.4 billion. Financial institutions in the U.K., Belgium, U.S., Russia, and Iceland have all been rescued by authorities this week. Most dealers believe the European Central Bank will keep interest rates unchanged on Thursday and acknowledge greater downside risks to economic growth. Data released in the eurozone today saw EMU-15 September flash consumer price inflation fall to 3.6% from 3.8% in August. August French producer prices fell sharply and Germany’s jobless fell 29,000 m/m. Also, German August real wholesale sales were up 0.5% m/m. Euro bids are cited around the US$ 1.3840 level.

Japanese Yen

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥103.50 level and was capped around the ¥106.15 level. Traders are discounting about a 30% chance Bank of Japan will reduce the overnight call rate by 25bps from the current 0.50% rate by early 2009, according to swap contracts. Implied dollar/ yen volatility reached 19.1% today, its highest level since mid-March. Data released in Japan overnight saw August housing starts climb 53.6% y/y while the August jobless rate reached a two-year high at 4.2%. Also, August industrial output was off 3.5% m/m and August all-household spending declined 4.0% y/y. Moreover, September manufacturing PMI fell to a 6.5 year low. Prime Minister Aso pledged to protect Japan’s economic and financial systems today. Bank of Japan injected US$ 19.23 billion in yen in the money markets overnight. Today’s is Japan’s fiscal half-year end.

The Nikkei 225 stock index lost 4.12% today to close at ¥11,259.86. U.S. dollar bids are cited around the ¥102.45 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥148.55 level and was capped around the ¥151.35 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥191.00 level while the Swiss franc came off vis-à-vis the yen and tested bids around the ¥94.30 level.

British Pound

The British pound fell sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7755 level and was capped around the $1.8115 level. Data released in the U.K. today saw final Q2 GDP growth upwardly revised to 1.5% from 1.4%. Bank of England continued to provide liquidity to the U.K. banking system. Cable bids are cited around the $1.7730/ 1.7420 levels. The euro came off vis-à-vis the British pound as the single currency tested bids around the US$ 0.7840 level and was capped around the $0.7995 level.