Dollar Weakens on Rate Cut Expectation by Yan Xu

The dollar fell to a record low at 1.3847 versus the euro on expectation that the Fed may cut interest rates on its September 18 policy meeting.

Several Federal Reserve officials yesterday expressed their concerns on the credit crunch and its impact on the broader economy, reinforcing expectations for a half percentage point cut instead of a quarter percentage point cut as anticipated earlier. Fed Chairman Ben Bernanke said in Berlin that the ¡°global saving glut¡± is still helping to keep interest rates low. Fed Governor Frederic Mishkin said there is an important downside risk to the US economy. San Francisco Fed President Janet Yellen said that losses related to credit market may slow growth.

Interest-rate futures pricing showed traders see a 68 percent chance that the Fed will cut interest rates by half a percentage point to 4.75 percent on its policy meeting on September 18.

US international trade deficit increased from 58.14 billion to 59.25 billion in July as expected. Tomorrow has no major economic data due from US. The market will focus on the retail sales report, current account deficit, industrial production capacity utilization, and University of Michigan consumer sentiment report on Friday.

ECB President Trichet said that credit losses in the euro-zone were not big enough to weaken financial institutions. He reiterated that inflation risks remain on the upside, raising expectations that the central bank may lift interest rates at least once this year.

The loonie strengthened against the dollar after a run of better-than-expected housing data. Canada housing starts increased from 215.6k to 226.5k in August, beating the estimate of 220k. New housing price index rose 0.9% in July, above the expectation of 0.6%.

EURUSD will face interim resistance at 1.3850, followed by 1.3870 and 1.39. Additional ceilings will emerge at 1.3930, backed by 1.3950. Support starts at 1.38, backed by 1.3780, 1.3750 and 1.3730. Subsequent floors are eyed at 1.37.

GBPUSD encounters interim resistance at 2.0350, backed by 2.0380 and 2.04. Subsequent ceilings will emerge at 2.0420, followed by 2.0450 and 2.0480. On the downside, support begins at 2.03, followed by 2.0280 and 2.0250. Additional floors are eyed at 2.0220, backed by 2.02 and 2.0180.

USDJPY encounters interim resistance at 114.50, backed by 114.80 and 115. Subsequent ceilings will emerge at 115.30, followed by 115.50 and 115.80. On the downside, support begins at 114 and 113.80, followed by 113.50. Additional floors are eyed at 113.30, backed by 113 and 112.70.