The Forex Daily Digest – January 13, 2010

The U.S. dollar held to minor losses against a basket of its rivals after the Federal Reserve's report on regional economic conditions said conditions were improving modestly, and the U.S. Treasury said the government ran a budget deficit of $91.8 billion in December. The dollar index traded at 77 versus 76.84 just ahead of the release, for a loss of about 0.2% for the day. The USD fell against the EUR, GBP and the CAD but gained against the JPY.

The Fed's Beige Book was released this afternoon and it showed economic conditions continued to improve "modestly" as 2009 came to a close. Gains were also spreading across the country and ten of 12 Fed districts reported some increase in activity or improvement in conditions, up from eight in the last report in early December. The Beige Book said that the all-important Christmas retail season was better than weak season in 2008, but still far below 2007.

The USD got a lift against the euro earlier today after government data showed Germany's economy contracted more than anticipated last year, building on an earlier increase over a U.S. Federal Reserve official's hawkish rate remarks. Germany's economy lost some ground in 2009 for the first time in six years. Gross domestic product contracted 5% compared with the previous year, posting its biggest decline since the World War II. Most economists expected a contraction of 4.8%.

RBC Capital Markets report today that the CAD may weaken against currencies including the EUR and the JPY even as the USD faces “important resistance” against the so-called loonie at C$1.0420. And the Industrial Bank Co. and ING Groep NV said that China should widen the yuan’s trading band against the USD this year to allow greater exchange-rate swings that may discourage inflows of speculative capital.

China, which has become the world's biggest exporter, is coming under new criticism in the U.S. and Europe for using an "undervalued" currency to support its own economic and trade competitiveness. Beijing's policy of keeping the yuan weak has helped China become the first major economy to recover strongly from the world financial crisis but at the expense of its trading partners still working on coming out of recession.

The Bank of Japan (BOJ) is geared up to relax monetary policy even further this year as it braces for pressure from a new finance minister who is critical of the central bank. While BOJ officials don't expect Naoto Kan to make overt demands for action, they do see him as a tough negotiator who will pressure the central bank for more steps if the economy weakens. Among the options being proposed within the central bank are more BOJ buying of government debt or increasing the easy money it could make available from an expansion of the fund-supply operation put in place in December.

Two Federal Reserve policy-makers said that even though the unemployment rate will likely stay high for a while, the U.S. central bank needs to guard against the potential for inflation as it unwinds its extraordinary economic support. Meantime, the White House said today that President Obama's emergency spending measures last year saved up to 2 million U.S. jobs.

On Thursday’s economic calendar, watch for Initial Jobless Claims, Retail Sales figures for December, Import & Export Prices for December and the November Business Inventories. Scheduled earnings reports include Briggs & Stratton, Intel, Shuffle Master, Origin Agritech, and CRA International.