Market Wrap - 13 November 2007

USD: The dollar gained on Monday, reversing some of its recent losses as nervousness about credit-related losses at U.S. banks triggered a wave of risk reduction in light volume trading. With bets against the dollar at record levels, major investment banks have announced more than $50 billion in write-downs and losses resulting in part from subprime mortgage loans gone bad. This has raised fears that there may be more losses to come, driving dealers to reduce the level of risk they take overseas. Prior to Monday, the dollar had been falling steadily on expectations the Federal Reserve would cut its benchmark interest rate to stave off an economic recession potentially brought on by weakness in the housing sector.

EUR: The Euro dollar traded to a low of 1.4527 before closing around the 1.4550 level in the New York session. On the data front, Eurozone industrial output and the German ZEW survey are both due out later today in Europe.

JPY: Independent of dollar strength, the yen has been charging higher in the last week. It climbed to a 1-1/2-year high against the dollar on Monday, benefiting as investors unraveled risky trades in which they borrow low-yielding currencies to buy higher-yielding ones. Top government spokesman Nobutaka Machimura said on Monday it was wrong to conclude that a high yen was a bad thing for Japan and that the government has no plan to intervene in the foreign exchange market. Data released today showed that Japan's economy grew a bigger than expected 0.6 percent in the July-September quarter. But the market shrugged off the growth as it did little to alter views that the Bank of Japan will not raise interest rates until well into next year. The BOJ kept interest rates unchanged at 0.50 percent on Tuesday, as widely expected, reflecting caution among central bankers over market uncertainty and fallout from problems in the U.S. housing sector.

AUD: The Australian dollar recovered off three-week lows against the U.S. dollar after most regional stock markets edged up, leading to an easing in the savage unwinding of risky carry trades that hit the Aussie in recent sessions. The Aussie inched up against the yen from a two-month low of 95.58 yen, but investors remained wary of returning to carry trades as risk aversion remained dominant, given expectations big U.S. banks could face more subprime losses. A series of announcements by major U.S. investment banks about losses from the subprime mortgage crisis in the past week have raised fears that credit-related woes would spread to the broader U.S. economy.

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