Euro Snaps Back Against Dollar

U.S. 10-year Treasury bonds continued to tread
water today, as prices remained little changed following PPI and housing
reports. The PPI report showed that producer prices had risen the most in
three decades last month, besting analyst expectations on a positive,
growth-oriented spin. Housing permits came in slightly higher than
expected, but the fact remains that the housing market has been showing
significant weakness, and the expectations were just higher than October’s
numbers, which were the lowest since 2000. The two reports did little to
change the actual price of bonds or the yield; however, they do shed light on
the fact that the economy is still showing viable signs of growth, while the
housing sector remains slow. Interest rate futures are showing a less than
20% chance that the Fed will be forced to cut rates by March, whereas just three
weeks ago interest rate futures were showing a more than 30% chance of a cut.
Bonds have become less bullish on a string of positive economic reports (jobs
and retail sales), but the housing sector continues to create broad economic

The euro surged against the dollar and yen today,
setting a new record against the Japanese currency, after a report from Germany
showed that business confidence had risen in December. The growth-positive
report sets up the euro for continued rate hikes into 2007; ECB President
Trichet has refrained from guaranteeing cuts early in the new year, but the
strength of the European economy has kept the euro pushing higher against the
major currencies. The currency market favors currencies backed by hot,
inflationary economies that are in rate-tightening schedules. Both Japan
and the U.S. have consistently failed in recent months to prove that rate hikes
are necessary, leading to a 20-month low for the dollar against the euro, and an
all-time low for the yen against the euro. Neither the U.S. nor Japan sees
any real chance of a rate hike during the first half of the new year, while the
euro seems poised to move even higher on the global currency market.

Crude oil rose 1% to close at $62.87 on fears
that tomorrow’s energy inventory report will show a decline in energy supplies
for the U.S. Crude has risen the last 4 days on concerns over OPEC’s
planned production cuts, which are nearing 2 million barrels a day. OPEC
initially agreed on a 1.2 million barrel a day cut, but has recently tacked on
an additional 500,000 barrels a day to combat the falling price of oil.
Oil has fallen 25% from record July highs, and the international organization
has been rallying its members into a cut in order to remove surplus supplies on
the market. Natural gas was little changed near 8-week lows, as U.S.
weather and supplies remain balmy.

Gold rose 1.2% as the dollar fell against the
euro. Gold usually moves inversely to the dollar, as the metal is used as
a hedge against weakness in the U.S. currency. A German business
confidence report sparked buying in the euro against the dollar, which caused
gold to move higher through the day. Oil’s move higher also helped, as the
metal is also used as protection against rising oil prices. Gold is down
around 20% from May highs, but still lies well-above last year’s levels.
Copper prices fell about 0.4% after a building permit report in the U.S.
continued to show weakness in the housing sector. Copper is commonly used
in the building of homes and industrial buildings.

Grains moved higher today across the board.
Corn rose 2% and soybeans rose just under 1%. Wheat also rose just under

Economic News

PPI rose 2% in November, the biggest increase
since 1974.

November housing starts came in above analyst
expectations, but were still near the October 6-year lows.

John Lee

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