The dollar declined modestly versus most other key currencies on Tuesday after unexpected rises in housing starts and building permits reignited the stock market. The Federal Open Market Committee's interest rate decision meeting on Wednesday is keeping most major currencies in narrow trading ranges. The Fed will likely keep its target lending rate in a range of zero to 0.25% and may even loosen its monetary stance further by using the asset side of the Fed's balance sheet to buy treasuries. The euro rose on better risk appetite and improving investor sentiment in Germany/EMU, however, remaining below the important 1.31 resistance. Sterling fell as UK home prices dropped. The Canadian and Australian dollars gained on higher commodity prices.

After finding support from the lower trading band in its upward-sloping trading channel, the USD/JPY rose for a fourth day as the Bank of Japan said it will provide up to one trillion yen ($10.2 billion) in subordinated loans to Japanese banks to shore up capital ratios. Unless risk aversion returns, the USD/JPY will move higher. There lies support in the 97 area and resistance in the 99-100 area.

Financial and Economic News and Comments

US and Canada

US producer prices increased a less-than-expected 0.1% m/m in February after advancing 0.8% m/m in January, according to the Labor Department. The February PPI advance was led by energy, which increased 1.3% m/m. The PPI declined 1.3% y/y. The core PPI increased a slightly more-than-expected 0.2% m/m, due to a 0.3% m/m gain in consumer goods, excluding food. The core PPI rose 4.0% y/y.

US housing starts unexpectedly rose a seasonally adjusted 22.2% m/m in February to 583,000 units at an annual rate following seven consecutive declines, data from the Commerce Department showed. The rise in February housing starts was driven by multiple-family units, which surged 82.3% m/m. Starts for single-family homes increased 1.1% m/m. Housing starts increased in the northeast, midwest, and the south, but fell in the west. Housing starts dropped 47.3% y/y. Building permits unexpectedly increased 3.0% m/m in February to 547,000 units at an annual rate. Single-family permits climbed 11.0% m/m in February, but dropped 42.3% y/y.

Canadian labor productivity fell for the fifth time in six quarters, falling 0.5% q/q in Q4 2008, after Q3's upwardly revised 0.1% q/q increase, according to Statistics Canada.

Europe

Euro zone investor confidence unexpectedly improved in March, with the ZEW euro zone economic sentiment index increasing to -6.5 from February's -8.7, the ZEW Centre for European Economic Research reported. The current economic situation index increased to -90.7 in March from -91.0 in February.

Germany's investor confidence unexpectedly rose for a fifth consecutive month in March, with the ZEW German economic sentiment index rising to -3.5, its highest level since July 2007, and up from February's -5.8, according to the ZEW Centre for European Economic Research. The current economic situation index, however, fell to -89.4 in March, the lowest since September 2003, down from -86.2 in February. Despite the decline in the current situation indicator, German investor confidence will likely continue trending upwards.

UK house prices fell 11.5% y/y in January after falling 10.2% y/y in December, the Department for Communities and Local Government said, adding to evidence the UK recession is deepening.

Asia-Pacific

Reserve Bank of Australia board members saw “reasonable cases” for both pausing to evaluate the Australian economy and lowering the benchmark interest rate from a 45-year low of 3.25%, according to minutes of the March 3 meeting, released in Sydney today. The minutes read: “The question for policy was whether further stimulus should be added at this meeting, or whether, having reduced rates at each meeting since September, the Board should pause for a further evaluation of the situation. Members could see reasonable cases for both courses of action. On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings.”

Japan's tertiary industry index unexpectedly increased 0.4% m/m in January, led by the compound services sector, following a 1.6% m/m decline in December, the Ministry of Economy, Trade, and Industry said.

FX Strategy Update

By Hans Nilsson
Capital Market Services, L.L.C.