The US dollar retreated from recent gains against a basket of currencies after yesterday’s shocking interest rate hike from China. Investors restored their appetite for higher-yielding assets and returned to selling the dollar against most currencies. Any rebound in the dollar may be short-lived due to the broad expectation that the U.S. Federal Reserve will inject billions into the money supply in efforts to lift the U.S. economy.

Domestically, the International Council of Shopping Centers and Goldman Sachs reported a year/year increase of +1.7% on US chain store sales. Meanwhile, the Mortgage Bankers Association data showed US home loan demands fell for a third straight week, even as mortgage rates dropped to an all time low. The average 30-year mortgage rate has dropped to 4.44%, near its record low of 4.43 which dates back to 1990. Current concerns over economic recovery and the job market prevent many buyers from making sizeable financial commitments.

The euro continued to gain against the US dollar after German Chancellor Angela Merkel commented on exit strategies as the ECB anticipates monetary easing from the US.  Merkel also stated that the German economy could grow by 3% or more this year and government sources expects gross domestic product (GDP) to increase by 3.4% for 2010.

The British pound stripped gains against the dollar and weakened vs. the euro after the UK government announced detailed public spending cuts. Finance Minister George Osborne announced that the government aims to cut half a million public sector jobs, raise the retirement age to reach 66 by 2020 and introduce a permanent levy on banks. However, he highlighted Britain’s four year plan to increase capital spending by 2 billion pounds per year until 2014-15.

The Japanese yen rose against the dollar as selling of the greenback persists across the board. Bank of Japan Deputy Governor Kiyohiko Nishimura highlighted concerns about yen strength as a major negative factor for Japan’s economy. “…the recent yen appreciation is causing a deterioration of business sentiment is a big factor in putting downward pressure on economic activity,” commented Nishimura. He also warns that a strong yen may prolong Japanese deflation. The Bank of Japan will hold its next policy meeting on Oct. 28, where it will release its semiannual outlook on growth and prices.

The Canadian dollar climbed against the US dollar after the greenback tumbled and the Bank of Canada reinforced that considerable monetary stimulus is in place for Canada. The central bank said it would have to consider any further rate increases carefully, given the weak US outlook and the slower than expected  global recovery.

Domestically, Statistics Canada data showed wholesale trade rose 1.2%, which was higher than the forecasted 0.5% in August from July.  Sales were expected to be moderate due to the decrease from June to July of -.01%. The August figure was the biggest month/month gain since January. Positive numbers in August signals relief and optimism as it followed months of lackluster reports.

The Australian and New Zealand dollars rose sharply against the US dollar, recovering from the wake of a steep fall from China‘s unexpected rate hike yesterday. The commodity-linked Aussie rose along with the rebound in oil and US stock indices.

Indications of Overnight rates:

10-Year Treasury Note Yield:  2.482%

Dow Jones Industrial Average:  11,135.30 + 157.65

This market summary is prepared by Union Bank’s Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.