3SOF

Wednesday, December 8, 2010...

•   The dollar index this morning is trading higher with the dollar/yen +0.46 yen and the euro/dollar -0.23 cents. The dollar index yesterday traded lower early after President Obama said he would agree to extend tax cuts, but erased its losses and finished higher as the euro weakened: Dollar Index +0.286, USDJPY +0.833, EURUSD -0.00459. The yen rallied to a 3-week high against the dollar but erased its gains and settled lower.

                Bullish factors included (1) comments from Japanese finance minister Noda who said the yen's movements have become one-sided and he will "keep a close eye" on the market, which may signal possible intervention in the currency market by Japan if recent yen strength continues, and (2) a possible increase in the safe-haven demand for the dollar after the IMF warned that the European economic recovery could "easily be derailed" by the debt crisis and that European finance ministers should increase the size of its 750 billion euro ba ilout fund.

                Bearish factors for the dollar included (1) reduced safe-haven demand for the dollar after global stock markets rallied when President Obama agreed to extend he Bush-era tax cuts for 2 years, and (2) the action by European finance ministers to rule out immediate aid for Portugal and Spain or to increase the 750 billion-euro bailout fund.

Thursday, December 9, 2010...

•   The dollar index this morning is trading higher with the dollar/yen -0.01 yen and the euro/dollar -0.44 cents. The dollar index yesterday moved higher on speculation the extension of US tax cuts will sustain the economic recovery: Dollar Index +0.140, USDJPY +0.541, EURUSD +0.00007.

                Bullish factors included (1) carry-over support from Tuesday's news of the extension of the Bush-era tax cuts, which may boost US economic growth, (2) the jump in the 10-year T-note yield to a 6-month high, which improves the dollar's interest rate differentials and may boost foreign demand for dollar-denominated assets, and (3) the unexpected decline in Oct German exports, which may signal a slowdown in the European economy and is euro negative.

                Bearish factors for the dollar included (1) the passing of an initial series of votes by Irish lawmakers for budget cuts in Ireland's 2011 budget, which is euro positive as it signals the possible passage of an austerity plan by Ireland to secure bailout funds, and (2) the unexpected increase in the Nov Bank of France business sentiment to a 2-3/4 year high.

Friday, December 10, 2010...

•   The dollar index this morning is trading lower with the dollar/yen -0.25 yen and the euro/dollar +0.17 cents. The dollar index yesterday closed higher for the fourth consecutive session on increased safe-haven demand after Ireland's credit rating was downgraded: Dollar Index +0.072, USDJPY -0.290, EURUSD -0.00237.

                Bullish factors included (1) weakness in the euro after Fitch Ratings cut Ireland's credit rating 3 levels to BBB+ from A+, citing "the additional fiscal costs of restructuring and supporting the banking system," and (2) the ECB's monthly bulletin which said the central bank will keep its emergency liquidity measures "as long as necessary, and at least" until mid-April.

                Bearish factors for the dollar included (1) strength in the yen after Q3 Japan GDP was revised higher, and (2) the euro positive statement from Fitch Ratings that said the Euro-Zone's "underlying credit fundamentals" are stronger than markets show and that the ri sk of a break-up of the Euro-Zone "is not sufficiently great to be factored into its sovereign debt ratings."

Monday, December 13, 2010...

•   The dollar index this morning is trading weaker with the dollar/yen +0.05 yen and the euro/dollar +0.56 cents. The dollar index last Friday finished slightly higher as the Oct US trade balance shrank more than expected and European leaders disagreed on how to stem the sovereign-debt crisis: Dollar Index +0.001, USDJPY +0.205, EURUSD -0.00106.

                Bullish factors included (1) weakness in the euro after France backed Germany in refusing to add to the European Union's 440 billion ($581 billion) rescue fund and rejected the idea of issuing joint euro-bonds, which shows division among European leaders on how to quell the European debt crisis, (2) the narrower than expected Oct US trade deficit which shrank to its lowest level in 9 months, and (3) the unexpected declines in Oct French industrial and manufacturing production, which is euro bearish.

                Bearish factors for the dollar included (1) reduced safe-haven demand for the dollar after the stock market rallied when the Dec US University of Michigan consumer confidence rose more than expected to a 6-month high, and (2) euro supportive comments from ECB President Trichet who said the economic recovery in the Euro-Zone is "on track" and that "every quarter we have revised upward the projections for growth this year in 2010."

Tuesday, December 14, 2010...

•   The dollar index this morning is trading weaker and posted a 3-week low in overnight trade with the dollar/yen -0.36 yen and the euro/dollar +0.78 cents. The dollar index yesterday fell to a 1-week low on reduced safe-haven demand after global stock markets rallied: Dollar Index -0.786, USDJPY -0.559, EURUSD +0.01631.

                Bearish factors included (1) the action by China to refrain from raising interest rates, which lifted global equity markets on increased demand for riskier assets, and (2) the statement from Moody's Investors Service that said the US tax-cut package up for a procedural vote in the Senate boosts the chances for a negative outlook on the US credit rating.

                Bullish factors for the dollar included (1) the early jump in Treasury yields which improved the dollar's interest rate differentials and may improve foreign demand for dollar assets, and (2) the quarterly report from Germany's Bundesbank that said 2011 German GDP growth may weaken to 2.0% from 3.6% this year as the German economy shows a "considerable slowdown" in Q1 of 2011, which is euro negative.

Wednesday, December 15, 2010...

•   The dollar index this morning is trading higher with the dollar/yen +0.18 yen and the euro/dollar -0.20 cents. The dollar index yesterday rebounded from a 3-week low and closed little changed on speculation that a strengthening US economy will prompt the Fed not to increase its asset purchases: Dollar Index +0.083, USDJPY +0.268, EURUSD -0.00129.

                Bullish factors included (1) the rise in Treasury yields after Nov US retail sales increased more than forecast, which may prompt the Fed to reduce its purchases of Treasury debt, and (2) the prediction from Bank of Tokyo-Mitsubishi that the dollar will strengthen to $1.27 per euro in Q1 of 2011 as the ongoing European sovereign-debt crisis will fuel an increase in the safe-haven demand for the dollar because "the dollar is the only viable liquid reserve-currency alternative to the euro."

                Bearish factors for the dollar included (1) reduced safe-haven demand for the dollar as the stock market rallied, (2) the stronge r than expected Dec German ZEW economic sentiment which is euro positive, and (3) the Fed's pledge to keep interest rates low for an "extended period" along with keeping their plan to purchase $600 billion of Treasuries through June to "promote a stronger pace of economic recovery."

Thursday, December 16, 2010...

•   The dollar index this morning is trading lower with the dollar/yen -0.19 yen and the euro/dollar +0.41 cents. The dollar index yesterday closed higher on increased safe-haven demand from the European debt crisis along with stronger-than-expected US economic data: Dollar Index +0.894, USDJPY +0.580, EURUSD -0.01641.

                Bullish factors included (1) increased safe-haven demand for the dollar after Moody's Investors Service put Spain's credit rating on review for possible downgrade, (2) stronger-than-expected US economic data after the Dec Empire manufacturing index expanded more than expected while Nov industrial production rose more than forecast and Nov capacity utilization climbed to a 25-month high, and (3) the jump in the yield on the 10-year T-note to a 7-month high of 3.556%, which improves the dollar's interest rate differentials and may boost foreign demand for dollar assets.

                Bearish factors for the dollar included (1) a decrease in foreign demand for US dollar ass ets after the Oct TIC flows slowed from a month earlier, and (2) the prediction from Citigroup that the dollar may drop 11% against the euro next year as investors shun US assets and drive Treasury prices lower.

Friday, December 17, 2010...

•   The dollar index this morning is trading little changed with the dollar/yen +0.13 yen and the euro/dollar +0.09 cents. The dollar index yesterday finished slightly lower as short-covering in the euro ahead of the 2-day meeting of EU leaders offset stronger-than-expected US economic data that boosted Treasury yields: Dollar Index -0.080, USDJPY -0.326, EURUSD +0.00299.

                Bearish factors for the dollar included (1) concern that the US housing crisis may derail the economic recovery after Nov US building permits unexpectedly declined to 19-month low, (2) euro short-covering ahead of the 2-day summit in Brussels by EU leaders to discuss the debt crisis, and (3) the larger-than-expected increase in the Dec German PMI manufacturing index to a 5-month high, which is euro positive.

                Bullish factors included (1) stronger-than-expected US economic data on weekly initial unemployment claims and Dec Philadelphia Fed manufacturing, which sent the yield on the 10-year T-note to a 7-mo nth high of 3.56% and improves the dollar's interest rate differentials and may increase demand for dollar assets, (2) the action from Moody's Investor's Service to place Greece's Ba1 local and foreign currency government bond ratings on review for possible downgrade, which is euro negative and may increase the safe-haven demand for the dollar.

Monday, December 20, 2010...

•   The dollar index this morning is trading higher with the dollar/yen -0.20 yen and the euro/dollar -0.21 cents. The dollar index last Friday rallied to a 2-week high and closed higher on increased safe-haven demand on concern the European sovereign-debt crisis will worsen: Dollar Index +0.192, USDJPY -0.035, EURUSD -0.00584.

                Bullish factors for the dollar included (1) increased safe-haven demand for the dollar after Moody's Investors Service downgraded Ireland's credit rating five notches to Baa1 from Aa2 with a negative outlook, (2) weakness in the British pound which plunged to a 3-month low against the dollar after Nov UK nationwide consumer confidence unexpectedly fell to a 20-month low, and (3) disappointment that the 2-day EU summit on the debt crisis failed to yield any immediate concrete steps to stem the crisis, which undercut confidence in the euro and fueled its decline to a 2-week low against the dollar.

                Bearish factors included (1) the unexpected increase in the Dec German IFO business climate which rose to its highest level since records for a reunified Germany began in 1991 and is euro bullish, and (2) the agreement by European Union leaders to amend the bloc's treaties to create a permanent debt-crisis mechanism in 2013, which temporarily boosted the euro.

Tuesday, December 21, 2010...

•   The dollar index this morning is trading lower with the dollar/yen -0.12 yen and the euro/dollar +0.24 cents. The dollar index yesterday climbed to a 2-week high and finished higher due to increased safe-haven demand on concern Europe's debt crisis may worsen: Dollar Index +0.255, USDJPY -0.107, EURUSD -0.00542.

                Bullish factors for the dollar included (1) the slide in the euro to a 2-week low against the dollar after the ECB said it has "serious concerns" that Ireland's new banking legislation might threaten the central bank's ability to run liquidity operations, (2) increased safe-haven demand for the dollar after the costs to insure French government debt rose to a record, which indicates France may be at risk of losing its top credit rating, (3) the unexpected drop in Dec Euro-Zone consumer confidence which weakened for the first time in the last 6 months, and (4) comments from St. Louis Fed President Bullard who said the European fiscal crisis is "very serious" and that he thinks it will continue for "quite a while."

                Bearish factors included (1) comments from Spanish Finance Minister that Salgado who said that Spain will meet its overall deficit goal of 9.3% of GDP this year, which is euro positive, and (2) euro bullish comments from ECB President Trichet who attempted to jawbone the euro higher when he said the euro remains a credible currency and the idea that some states might withdraw from it is "absurd."

Wednesday, December 22, 2010...

•   The dollar index this morning is trading lower with the dollar/yen -0.23 yen and the euro/dollar +0.56 cents. The dollar index yesterday traded mixed most of the day but then rallied to a 2-week high late in the session and closed higher on increased European debt concerns: Dollar Index +0.255, USDJPY -0.107, EURUSD -0.00542.

                Bullish factors included (1) increased safe-haven demand for the dollar as the euro slipped to a 2-week low against the dollar on concern the European sovereign-debt crisis may worsen after the cost to insure Portuguese government debt rose to a 3-week high when Moody's Investors Service said it may cut Portugal's bond rating "by a notch or two" because of concerns over "sluggish" economic growth, along with the action by Fitch Ratings to put Greece's debt ratings on rating watch negative as it reviews the nation's "fiscal sustainability," and (2) a possible increase in international demand for dollars after the Fed e xtended its dollar swap arrangement with the ECB, the BOJ, the BOE, the BOC and the SNB through Aug 1 of 2011.

                Bearish factors for the dollar included (1) reduced safe-haven demand for the dollar after global stock markets rallied and as tensions eased on the Korean Peninsula, and (2) comments from Jean-Claude Juncker, head of the Euro-Zone finance ministers, who attempted to jawbone the euro higher when he said the "euro is not in crisis" and that any such speculation is "unfounded chatter."

Thursday, December 23, 2010...

•   The dollar index this morning is trading little changed with the dollar/yen -0.53 yen and the euro/dollar -0.10 cents. The dollar index yesterday gyrated on either side of unchanged as weaker-than-expected US economic data offset European debt crisis concerns: Dollar Index +0.009, USDJPY -0.172, EURUSD -0.00015.

                Bearish factors included (1) the weaker than expected upward revision to US Q3 GDP along with the smaller-than-expected increase in Nov US existing home sales, and (2) strength in the euro after Nov German import prices rose a more-than-expected +10.0% y/y, a 10-year high.

                Bullish factors for the dollar included (1) the slump in the British pound to a 3-1/2 month low against the dollar after Q3 UK GDP was unexpectedly revised lower, and (2) increased safe-haven demand for the dollar on concern the European sovereign-debt crisis will worsen after credit-default swaps insuring Greek government debt rose 13 bp to a 1-month high of 983 bp.

Monday, December 27, 2010...

•   The dollar index this morning is trading weaker and at a 1-week low with the dollar/yen -0.09 yen and the euro/dollar +0.39 cents. The dollar index last Thursday finished weaker as reports showed strength in the US economy, which reduced demand for the dollar in favor of riskier higher-yielding assets: Dollar Index -0.231, USDJPY -0.654, EURUSD +0.00145.

                Bearish factors included (1) the increase in Nov US personal spending for a fifth month, which indicates the economic recovery is continuing, and (2) the stronger-than-expected Nov French consumer spending, which is euro positive.

                Bullish factors for the dollar centered on increased safe-haven demand on concern the European sovereign-debt crisis is worsening after (1) Fitch Ratings cut Hungary's long-term credit rating with a negative outlook and also downgraded Portugal's long-term foreign and local currency issuer default ratings with negative outlooks, and (2) credit-default swaps to insure Greek government debt ro se +38 bp to a 1-month high of 1,019 bp.

Tuesday, December 28, 2010...

•   The dollar index this morning is trading lower and at a 1-week low with the dollar/yen -0.94 yen and the euro/dollar +0.100 cents. The dollar index yesterday fell to a 1-week low and closed lower after China raised interest rates: Dollar Index -0.108, USDJPY -0.112, EURUSD +0.00511. The Japanese yen climbed to a 2-1/2 week high against the dollar.

                Bearish factors included (1) the action by China to hike interest rates for the second time in 2 months, which boosted the yen to a 2-1/2 week high against the dollar on increased safe-haven demand, and (2) strength in the euro after the ECB said it boosted its purchases of Euro-Zone government bonds the past week to 1.12 billion euros ($1.45 billion), nearly double the previous week, which may stop or slow the European debt crisis and reduce the safe-haven demand for the dollar.

                Bullish factors for the dollar included (1) comments from ECB Executive Board member Stark who said that while some European economies have shown surprisingly strong recoveries, high debt levels don't only affect individual nations and "we are still in an open crisis," and (2) weakness in the commodity currencies of Australia and Canada on speculation that Chinese commodity demand will weaken after it raised interest rates.

Wednesday, December 29, 2010...

•   The dollar index this morning is trading weaker with the dollar/yen -0.25 yen and the euro/dollar +0.09 cents. The dollar index yesterday fell to a 1-week low but recovered its losses and finished little changed after the ECB failed to neutralize the extra liquidity created by its bond purchases: Dollar Index -0.001, USDJPY -0.419, EURUSD -0.00499. The Japanese yen rallied to a 1-1/2 month high against the dollar.

                Bullish factors for the dollar included (1) the unexpected downward revision to Q3 French GDP, which is euro negative, (2) the action by the ECB to drain only 61.78 billion euros of excess liquidity caused by its recent bond purchases, nearly 13 billion euros less than the 73.5 billion euros it intended to absorb, which is actual quantitative easing and is bearish for the euro, and (3) comments from Japanese Finance Minister Noda who attempted to jawbone the yen lower with hints of currency intervention when he said the yen's recent appreciation has been &qu ot;one-sided" and he warned of "bold" action against the yen's advance if needed.

                Bearish factors included (1) the unexpected decline in Dec US consumer confidence which is dollar negative, and (2) the larger-than-expected decline in the Oct S&P/CaseShiller home price index, which may prompt the Fed into additional easing measures due to the weak housing market.