The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9660 level and was capped around the $1.9745 level. Sterling could not maintain intraday gains notched after it was reported that the CBI June retail sales survey found 39% of respondents said H1 June sales were lower than one year ago while 30% indicated they improved, for an ensuing net balance of -9% - up from -14% in May and better than expected. These data suggest retail sales remain relatively weak. Bank of England Deputy Governor Gieve reported he expects a “downturn in economic activity over the rest of the year.” On the political front, London’s High Court rejected a legal move to force the British government to hold a referendum on the European Union’s Lisbon Treaty. Cable bids are cited around the US$ 1.9360/ 1.9100 levels. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7920 level and was supported around the ₤0.7890 level.

The euro came off vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.5535 level and was capped around the $1.5615 level. Most traders expect the Federal Open Market Committee will keep the overnight call rate unchanged at 2.00% today and signal that inflation poses more of a threat than a slowdown in economic growth. Some traders believe the FOMC will move rates higher this year while others believe the Fed will take a wait-and-see approach before adjusting borrowing costs. The Fed is also expected to acknowledge the beleaguered U.S. housing sector, ongoing credit market dislocations, and weakness in the employment sector. Data released in the U.S. today May durable goods orders unchanged m/m and off 0.1% y/y while the ex-transportation component was of 0.9% m/m. Also, May building permits were revised to -0.4% from -1.3% and May new home sales were off 2.5% to a 512,000 unit annualized pace. In eurozone news, the European Central Bank announced it will hold a press conference after its 7 August Governing Council meeting. The ECB traditionally holds a telephone conference after some summer rate-setting meetings and this has led to speculation that the presumed +25bps rate hike to 4.25% in July will not be a one-off move. ECB’s Wellink reported Dutch inflation may top 3% in Q3 while ECB President Trichet reiterated he does not “envisage a series of increases (in official interest rates).” ECB’s Noyer reported “Issuance of credit remains dynamic and there is no concrete threat of a (further) credit crunch.” Data released in the eurozone today saw EMU-15 April factory orders up 2.5% m/m and 11.7% y/y, the fastest growth pace in six months. Euro bids are cited around the $1.5230 level

The Canadian dollar is slightly higher in light trading, having rallied modestly on the ongoing rebound in crude oil prices in Wednesday's early going.


The U.S. dollar was trading at C$0.9911 at 10:22 a.m. EDT (1422 GMT), from C$0.9956 at 8:00 a.m. EDT (1200 GMT) and C$0.9937 late Tuesday.


With no domestic data or other events on tap Wednesday, movements in the Canadian dollar have continued to be closely correlated with movements in commodity prices, most notably oil.


Oil's slump on Tuesday resulted in a mildly defensive tone for the Canadian dollar that took it to one-week lows, and the continuing slide in Wednesday's early going initially kept the Canadian unit pinned in tight ranges around the C$0.9950 area.


But as oil prices began staging a recovery, that enabled the Canadian dollar to likewise bounce back toward the C$0.9900 figure.


"A big driver of currency valuations across the board over the last 24 hours or more has been the price of energy and crude oil," said Jack Spitz, managing director of foreign exchange at National Bank in Toronto. "With crude as volatile as it is and staging a bit of an intraday rebound here, the Canadian dollar and commodity bloc currencies are also coming back."


Options-related activity and related technical factors have also contributed to the better tone for the Canadian dollar thus far Wednesday, Spitz added.


As long as oil prices can keep rebounding, the Canadian dollar might be able to regain some momentum to trade back into the low C$0.9800s, though the currency in recent sessions has repeatedly been unable to get past the C$0.9820 area.


Sustained inability to surmount that hump would likely build more pressure for a more substantial Canadian dollar correction back toward the parity mark with the U.S. dollar.


Canadian bonds are slightly lower in light trading early Wednesday, with the benchmark 10-year bond yielding 3.67%, unchanged from late Tuesday.


These are the exchange rates at 10:22 a.m. EDT (1422 GMT), 8:00 a.m. EDT (1200 GMT), and late Tuesday.

USD/CAD 0.9911 0.9956 0.9937
EUR/CAD 1.5524 1.5584 1.5600

CAD/JPY 105.48 105.29 104.96

The greenback kicked off the holiday-shortened week higher against the majors, edging up to 104.32 versus the yen and 1.5703 against the euro on the heels of mixed US economic reports earlier in the session. New home sales in April reversed an 8.5% decline in March, improving by 3.3% to 526k units. However, the Case Shiller home price index in March posted its steepest decline on record, down by 14.4% versus a 12.7% drop in February. Meanwhile, in another sign of the struggling US economy ¨C the Conference Board??s May Consumer Confidence survey dropped to a two-year low and worst than expectations to 57.2 versus April at 62.3.

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With the euro surging to new highs against the dollar, many people wonder how much farther the young currency can climb and what its new strength says about the U.S. economy's current troubles. But this is a short-term view and a one-sided focus. In the longer term, we see the euro's growing popularity in large part as a reflection of the growth, development, and vibrancy of the euro zone's financial markets.


The euro serves a rapidly expanding area, now comprising 15 countries with 318 million people?a bigger population than the U.S.'s 300 million. And these nations' combined gross domestic product last year was not much less than U.S. GDP. The euro area's financial markets are growing to reflect this economic clout.


The McKinsey Global Institute calculates the euro area's financial markets grew by $4.2 trillion in 2006, the most recent year for which comprehensive data are available, to a total of $37.6 trillion. This boosted the euro zone's financial depth (the ratio of its financial assets to GDP) to more than 3.5 times its economic output. While this is still less than the financial depth of either the U.S. or Britain, the euro area is gaining fast. Its financial depth has grown 5.5% annually over the last 10 years, compared with the 2.8% pace of its Anglo-Saxon rivals.


A World Awash in Euros
Two-thirds of the euro zone's asset growth in recent years has come from private debt securities and equity market capitalization?a shift for financial markets that had historically been dominated by banks. And the expanding scale of the markets is attracting ever-larger pools of capital from institutional investors and sovereign wealth funds.


Europe's common currency quietly passed another milestone last year. In April, for the first time, the value of euro notes in circulation surpassed the combined value of all the U.S. dollars in wallets, piggy banks, and central bank vaults around the world. By Aug. 1, 2007, there were $840 billion worth of euro notes sloshing around the world, compared to $814 billion U.S. dollars.


Skeptics may argue this just reflects Europeans' preference for cash over plastic, or the growing use of euros to fund black-market activities around the world. (Indeed, the ?500 note?favored by the underworld?is the most popular euro denomination, accounting for 38% of the currency's value in circulation.) But we see this as yet another step in the euro's emergence as an international store of value, a tool of commerce, and a means of investment.


Gaining Ground as a Reserve Currency

Increasingly, the euro is becoming the currency of choice for companies around the world looking to issue international bonds and equities. By 2003, the euro had surpassed the dollar to become the most popular currency for international bond issues (although the overall size of the U.S. bond market remains larger). And companies from Eastern Europe, India, and other emerging markets are increasingly choosing Luxembourg and other European financial markets over New York to list their public stock offerings.


As the breadth and liquidity of euro financial markets grow, the euro also is gaining ground as a reserve currency. The U.S. dollar is still the preferred reserve currency of the world's central banks, accounting for around two-thirds of the total. But already, the euro has become the second most popular, with a 25% share of global reserves since 2003, up from 18% in 1999. This share is likely to rise as countries such as China and those in the Middle East peg their currencies' values less to the dollar and more to baskets of currencies that give the euro a prominent role.


The rise of the euro zone is making it a magnet for cross-border investing. In 2006, investors around the world purchased $8.2 trillion of financial assets in other countries, four times the amount just five years earlier. The euro zone accounts for roughly half of this growth. This reflects in equal parts the growing investments among euro zone countries, and cross-border investments between the euro zone and the rest of the world.


Good for Europe, Good for the World
There is growing concern on the other side of the Atlantic that Europe's rising financial markets spell doom for New York. But don't write off U.S. financial markets just yet. The U.S. remains the largest financial market in the world, with $56 trillion in financial assets at the end of 2006?one third of the global total of $167 trillion?including equities, government and corporate debt securities, and bank deposits. The U.S. led the world in financial asset growth in 2006, reflecting strong gains in equities as well as private debt, and in 2007 it regained the lead in initial public offerings by foreign companies.


The takeoff of the euro zone's financial markets will likely prove to be a boon, rather than a threat, to the U.S. Growth in capital markets around the world is not a zero-sum game. Stronger financial markets in Europe will benefit the Continent's businesses and its consumers?as well as U.S. exporters and investors. Indeed, as the U.S. markets struggle for now, observers around the world should cheer the long-term rise of Europe's financial markets as an alternate global financial strength.

by Diana Farrell