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DOLLAR: The Dollar has been able to trade firmer overnight on safe haven support as weaker global equity markets reflects doubt over whether the latest government stimulative plan would help resolve the credit crisis and avert a protracted and severe recession. With money market conditions still tight, the Dollar’s status as a safe haven currency still seems to be in tact and ongoing concerns over worsening economic conditions certainly seems to have lowered investor’s risk tolerance overnight as the market euphoria over the latest government stimulus efforts seems to be fading. In fact, with a wide range of US economic reports being released today, the Dollar’s stature as a safe haven currency will certainly be tested today since economic news is likely to show a deepening recession taking hold in the 4th quarter and that has the potential to trigger a strong rally in the dollar if equity markets slide sharply on the news. But we also think there is a rising risk that the appeal of the Dollar as a safe haven asset could start to diminish given the huge amount of US debt being used to pay for these massive economic stimulus plans. In fact, the governments quantitative easing and jitters over the cost of these stimulative efforts could limit the upside potential in the Dollar and very low US yields could also start to work against the currency. With plenty of other factors working against the Dollar, a loss in the currency’s safe haven status could send the Dollar sharply lower. Therefore, today’s economic report flow could be a critical test of the bull camp’s resolve.

EURO: The Euro has seen a two sided trade overnight, but it looks like some risk aversion has crept back into the market as yesterday’s optimism tied to the latest US government stimulative plan seems to have faded a bit. So far, news of another rate cut from China and expectations for a European Union stimulative plan of at least an 130 billion euros to be announced today hasn’t provided too much price support to the Euro. And with the market likely to to be faced with more bearish economic news, a potentially sharp slide in US equity markets this session is likely to drag the Euro down as well.

YEN: The Yen has firmed overnight as a lower investor risk tolerance amid ongoing concerns over the depth of a global economic recession has encouraged more profit taking on carry trades. News that China cut interest rates overnight seemed to pull the Yen off overnight highs. But there seems to be more upside potential in the Yen since economic confidence remains low and the optimism seen in the US equity market rally yesterday off the latest government stimulative program appears to have fizzled overnight. In fact, with a string of US economic reports out today there is the potential for the Yen to trade sharply higher if the news flow depicts a considerable worsening in US economic conditions.

SWISS: The Swiss has seen a mostly lower trade overnight as the currency continues to be tied to the ebb and flow of the Euro. Expectations for a large EU stimulative package have done little to improve sentiment. Since investors have not yet sought out the Swiss as a safe haven, the market remains vulnerable to further selling this session if today’s US economic reports raise the risk aversion of investors.

POUND: The Pound has pulled back on profit taking which is not too surprising considering the sharp upward push the currency has made this week. Weaker global equity markets overnight have lowered investor risk tolerance and expectations for the UK 3rd qtr GDP to show a .5% contraction is also working against the Pound this morning. There is also the potential for the market to give up more ground today since the large number of US economic releases are likely to show economic conditions worsening in the US which has the potential to pull the Dec Pound back towards the 150 level.

CANADIAN DOLLAR: The Dec Canadian has seen a two sided trade overnight as rising risk aversion and a firmer Dollar have been somewhat offset by firmer oil prices. But we suspect there is more downside potential in the Canadian today since the US economic reports are likely to show a deepening economic recession. Weakening US demand will certainly undermine the outlook for the Canadian Dollar considering that Canada is a major US trading partner.

This content originated from – The Hightower Report.
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