USD Drifts Lowers

The dollar traded lower against the majors at the start of the week, relinquishing the 2.07-level against the sterling and falling near the 118-mark versus the yen. Given the heightened uncertainty stemming from the ongoing credit crisis, growing fears of an imminent recession in the US economy continue to weigh on the greenback. With further deterioration in the housing market and consumer confidence, the key question among dollar bears is whether another 25-basis point rate cut from the FOMC is forthcoming.

Although the Fed adopted a neutral tone in its October policy statement while revealing an uncertain outlook in the minutes, further turmoil in the financial markets and accelerated deterioration in economic fundamentals will likely force the FOMC to ease again in December. Particularly key in the next policy decision will be the fragile combination consumer confidence, inflationary pressure, and economic growth data. In the Tuesday session, traders will focus on the Conference Board's November indication of consumer confidence, seen falling sharply to 91.6 versus 95.6 from October. Also due out this week will be October durable goods orders, existing home sales, a preliminary reading on Q3 GDP, October new home sales, October PCE and Chicago PMI. Interestingly, the data for Q3 GDP are expected to reveal resilient economic growth, expanding at a robust 3.5% y/y and 4.8% q/q, up from 2.6% y/y and 3.9% q/q, respectively. The Fed's Beige Book, slated for release on Wednesday will provide further insight into current conditions in the housing market, capital expenditures.

ECB President Jean-Claude Trichet reiterated that sharp and abrupt moves were disruptive to the global economy. He said that he was not campaigning for the international use of euros, adding that he has 'noted with great attention' the statements from US officials' such as Treasury Secretary Paulson that the strong dollar is in the interest of the US. There is no doubt that the euro's rapid ascent against the dollar and yen has started to impact the Eurozone economy. We expect more government jawboning to take place, but place little stock in any concerted intervention efforts to inflate the beleaguered greenback.