Forex Investment and Currency Trading

The USD hovers near record lows versus major currencies, with little prospect for near term improvement. While recent Fed actions may help to stabilize financial system concerns, there are increasing signs of US economic weakening. The Chicago Fed National Activity Index has fallen to levels normally associated with recession, and additional FOMC easing
is likely to push the USD index to new record lows during 2Q 2008.

Residual economic momentum and stubborn headline inflation suggest stable ECB policy through at least the next few months. Strong interest rate support has helped push the EUR TWI (BoE index) to within 1% of its October 1992 record high. A EUR/USD test above 1.60 appears to be an increasingly likely event during the weeks ahead.

While holding near 2.00 versus the weak USD, the GBP TWI (BoE index) is at its lowest level since March 1997, pushed lower by concerns over the housing and financial services sectors. However, overall GDP growth held near trend in 2007 and an imminent BoE ease is uncertain and we continue to favor long GBP exposure versus the USD.

There are clear signs of slowing economic momentum in Japan, but slightly positive inflation readings should keep the BOJ from easing policy. While USD/JPY may hold just below 100, the JPY is likely to remain soft versus European and other Asian currencies in line with its low domestic yields and renewed capital outflow into the new fiscal year.