7th Jan 2009 at 1230 hrs IST

• Dollar rose as Fed began buying mortgage-backed securities as part of a $500 b programme to revive the housing markets.

• Euro fell as plummeting Eurozone inflation raised expectations that the ECB would go for further rate cuts.

• General Motors said rescue loans already pledged by the U.S. government would ensure its survival, boosting investors sentiments.

• TODAY-USD Mortgage Approvals & Employment Change, EZ PPI.

Dollar rose for a sixth day against the yen, the longest run of gains in two years, after General Motors Corp. said rescue loans already pledged by the government should ensure the biggest U.S. automaker's survival. The dollar also advanced for a fourth day versus the euro on speculation U.S. President-elect Barack Obama's $775 billion package of tax cuts and government spending will help the economy recover from a recession. Meanwhile, Fed has begun buying mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie Mae as a part of a programme of as much as $500b to revive the housing markets from its deep slump. The start of the MBS purchases has pushed mortgage rates below 5%.

Economic data was mixed, with ISM non-manufacturing index unexpectedly improving to 40.6 in December but still in deep contraction region below 50. Employment component also improved slightly from 31.3 to 34.7, while price paid dropped slightly. However, factory orders dropped much more than expected by -4.6% in November, while pending home sales also dropped much more than expected by -4.0% in November.

Euro fell to three-week lows against the dollar and sterling as plummeting Eurozone inflation raised expectations that the European Central Bank was set to cut interest rates in the region. Eurozone consumer price inflation plunged to 1.6% in December from 2.1% in November, taking it substantially below the record high of 4% it hit in July and within the ECB's target range of 1-2%.
Pound will likely take center-stage for the remainder of the week because the BoE is the first major central bank to make the rate decision this month. The much expected 50bp rate cut would see rates at their lowest level in the central bank's three hundred year history. A day of mixed data showed Services PMI at 40.2, coming slightly off its all-time low level. However, Nationwide Consumer Confidence fell to a new five-year low at 47, while House prices fell a staggering 15.9% to a more than 15-year low.

Commodity currencies maintain their resounding strength. However, the carry trades are seeing much better rallies than USD pairs. This is particularly due to the weak yen as opposed to any fundamental surprises from the high-yielders. The weakness of the yen continued for another day, tallying a sixth straight day of advance in USD/JPY. The falling yen single-handedly boosted morale among stock and bond traders alike.

Other Markets

US treasuries were little changed, with 10-year note yields near a three-week high, on speculation gains in stocks will curb demand at a record $30 billion three-year auction today. The 2- year bond yield edged higher to .795% and the 10-year bond yield edged lower to 2.469%. The Japanese Government bond yield remained unchanged at 1.245%. UK gilt yield rose by 11 bps to 3.254% and the German bund yield rose by 14bps to 3.149%.

NYMEX Crude oil traded little changed at $48.25 a barrel after falling yesterday on signs the economy in the U.S., the world's biggest energy consumer, contracted further in November and December, pushing oil inventories higher. Gold rose by $4 to close at $863.90, while silver closed 22 cents higher at $11.48, yesterday. Gold is presently trading down by $4, while silver is trading lower by 21 cents.

Asian stocks rose, driving the regional benchmark index to a two-month high, after President- elect Barack Obama said the U.S. will run deficits for years, lifting speculation government spending will restore growth. The MSCI Asia Pacific Index jumped 2.2% to 92.85, while Japan's Nikkei 225 Stock Average added 2.4% to 9,295.64, rising for a seventh-straight day.

Technical Commentary

EUR: 1.3528

Upon holding 1.3310 fibo 68.1% from (1.2430 to 1.4740) the pair could test 1.3585 first followed by 1.3860 levels, else it is likely to stay range bound.

Range for the day: 1.3310 - 1.3860

Resistance: 1.3692, 1.3849, 1.4038

Support: 1.3346, 1.3157, 1.3051

Sterling: 1.4913

Cable is looking to target 1.4950 fibo 68.1% from (1.4450 to 1.5730) - upon holding these levels pair could rally towards 1.5240 levels intraday.

Range for the day: 1.4850 - 1.5200

Resistance: 1.5100, 1.5294, 1.5320

Support: 1.4616, 1.4316, 1.4127

Yen: 93.73

USD/JPY should sustain trade & close above 94.80 to maintain the bullish momentum and target higher levels, else it is likely to consolidate with downward bias.

Range for the day: 92.80 - 95

Resistance: 94.57, 95.49, 96.35

Support: 92.79, 91.93, 91.01

CHF: 1.1141

Pair is facing immediate resistance around 1.1280 levels. A firm break above these levels is required to confirm the bullish momentum else, intraday pair could correct by 200 - 300 pips.

Range for the day: 1.0810 - 1.1290

Resistance: 1.1258, 1.1371, 1.11463

Support: 1.1053, 1.0961, 1.0848