Key News

• British Pound Falls Against Dollar as House Prices Drop Most Since 1991 (Bloomberg)
• Nordic Currencies: Iceland's Krona Declines Against Dollar on Downgrades  (Bloomberg)
• Taiwan's Dollar Falls as Demand for Funding in the U.S. Currency Increases  (Bloomberg)

Quotable
If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.”

                                                             Aldous Huxley

FX Trading –ECB Policy Still Standing Still, Euro Losing Its Footing ...
I guess the European Central Bank is tired.

After pumping tens of billions of euros and dollars into its financial system over just the last two weeks, the ECB couldn’t muster up enough energy to cut rates today.  The ECB left their benchmark lending rate sitting at 4.25% after they concluded their policy meeting this morning.

In light of major risks of bank failures rising to the surface in Europe, a handful of investment banks took the opportunity to make their predictions yesterday. Those predictions: the ECB will cut rates before the end of the year.

Ok, so far the analysts at these banks who took a swing at the ECB’s plans are now 0 for 1. But let’s not count them out just yet ... the ECB meets plenty more times before 2008 comes to an end.

But if you’re banking on a rate cut to further weigh down the euro, you may not have to wait for the ECB to officially lower interest rates – the situation in Europe (though the ECB’s monetary policy has not yet capitulated) will likely be pressuring the euro through year-end. The market is pricing it in already.

And if the dynamics supporting the dollar really gain momentum, a serious capitulation among dollar bears could extend dollar-strength well into 2009 and bring the euro all the way down to earth.

A weekly chart of the euro:

The euro is having trouble, as we expected it would. The question is no longer ‘Can the euro go lower?’ Instead, it’s ‘How much lower can the euro go?’ You might be surprised.