The US dollar fell to a seven-week low against the euro as investors bet US interest rates will fall below the rates of the Euro-nation for the first time in three years.

Ø      The US deficit in international trade of goods and services surged by 9.3% to $63.12 billion from October’s $57.77 billion. In the third quarter, gross domestic product grew a stunning 4.9%.

Ø      US retail sales excluding automobiles decreased 0.1% after a 1.8% rise in November that was the biggest in almost two years.

Ø      Consumer spending in US is forecast to grow at an annual rate of 1.6% this quarter, down from an estimated 2.6% pace in the last three months of 2007. Spending expanded at an average 3.5% pace per quarter over the past decade.

Ø      At an annual rate, consumer credit in US grew 7.7% in November. That was a recovery from the depressed 1.0% gain in October.

German real new orders are flying high again in November after another surprising spurt in October. After the October rise, a drop off in November orders had been expected but orders are now growing at an annualized rate of 28% in the fourth quarter over Q3; domestic orders are up at a 16% pace. 

World Markets in motion:

Precious metals scored further gains as Gold & Silver futures notched up gains of 3.91% & 6% respectively. During the week, the greenback witnessed a setback against the Euro & the Indian Rupee but pared gains against the Sterling pound & Japanese Yen. Analysis and comments from some of the experts in the field are as under:

Ø      Range-bound choppiness is likely to define the dollar in the coming week, with expectations of Federal Reserve rate cuts working against the greenback but risk aversion over shaky stock markets offering it some support. There is a heavy flow of US data in the coming week to keep currency investors on their toes. Both the economic data – especially December retail sales due out Tuesday - and Bernanke’s comments are likely to cement market expectations that the Fed will deliver up to a half-percentage point rate cut at the end of this month in an effort to boost growth. Such expectations tend to work against the greenback because lower rates tend to reduce investors’ returns on dollar-based assets. However, the dollar is likely to find support, at least against the euro, from equity weakness amid concerns over more financial sector problems related to the US subprime mortgage crisis. These worries fuel risk aversion in currency markets that lead investors to sell higher-yielding currencies and return to lower-yielding, yet safer, ones. The yen and, to a lesser extent, the dollar stand to benefit from such safety plays.  Even with that support, analysts say the most probable scenario for the dollar is more weakness.

Ø       On January 21, 1980, gold recorded its then record high fix of $850, as a result of the Hunt Brothers' attempted corner of the silver market, plus the second oil crisis, the invasion of Afghanistan and the hostage crisis in Iran. This time we are lacking the silver market manipulation, but we have renewed bearishness for the dollar, not only due to tensions in the financial sector that are resulting in increased risk aversion, but also for the more basic fundamental reasons with respect to interest rate differentials; German 10-year rates are currently 20 basis points above those in the US. The differential has been as high as 37 basis points and it looks as if the gap will continue to widen. Inflationary concerns are less important this time than they were in 1980 - 28 years ago the US CPI peaked in March at just less than 15% - but the dreaded word "stagflation" has been on the lips of a number of economists and this, too, supports the investment case for gold. There is a degree of euphoria among some of the market observations, certainly in the lay press and this is often something of a warning signal. While there is little doubt that all the conditions remain in place for a further increase in the price of gold in the medium term, the latest move has developed in relatively thin market conditions and the market is looking overbought. Physical demand is waning and there is plentiful stream of scrap supply coming through in India. A correction in price would be a welcome development of the overall stability of the market, as the majority of the buying has come from the professional sector. The physical market is, for the longer term, a strong one, but the recent volatility in price will certainly deter buyers for a while yet. In the first 10 days of trading in January, gold has traded in a range between $834 and $898 (on an intra-day basis), or almost 8%. The increase since the latest leg of the rally got underway, which was in the week before Christmas, is $105 or just over 13%, in only three weeks. While the dollar has obviously been a key driver in the move, the price in euro terms has risen over the same period by almost 10%. This looks worryingly like too much, too quickly. The physical market in January tends to be dominated by the onset of the Indian Wedding Season, along with the Chinese New Year. The former is due in the middle of January and the latter falls on 7th February, and between them they form an important part of the physical market. There is no specific trend that can be displayed in the quarterly figures for physical demand as they are clearly responsive to price, but from 2003 to 2007, inclusive Greater China and the Indian Subcontinent have between them accounted for an average of 37% of worldwide jewellery and investment bars. The first quarter of the year, worldwide, is not typically the strongest quarter of the year; that position is held by the fourth quarter, which includes a number of Indian and Middle Eastern festivals plus the Christmas season. With European demand usually falling sharply in the first quarter, the demand for jewellery and investment bars has, on average from 2003-2007 inclusive, dropped by 189 tonnes between the fourth quarter of one year and the first quarter of the next. The recent volatility in price suggests that physical demand for gold for the imminent Wedding Season and New Year will struggle to reach the levels enjoyed in 2007. The quarterly demand for jewellery and investment bars during that period was 643 tonnes, compared with 611 tonnes in the first quarter of 2006. In simple monetary terms (i.e. working just on the basis of the quarterly average and the tonnage of contained gold), the value of the gold bought in Q1 2007 amounted to $134.5 billion, a 24% increase in the dollar expenditure in the first quarter of 2006. With the dollar price of gold currently 43% higher than at this time last year, the [Chinese] renminbi price up by 31% and the [Indian] rupee price by 25%, the prospects for a strong revival in physical demand look slender. There is little doubt that the fundamentals are in place for further medium term strength, but a pullback really would be most welcome if these higher levels are to be sustained and underpinned.

Ø      Commodities will attract more investors in 2008, extending a trend that has boosted investment in the asset class by more than $160 billion (82 billion pounds) since 2001, Barclays Capital said. Commodity assets under management reached $175 billion in 2007, a rise of $41 billion over the year - second only to the record increase of $48 billion in 2006. The recent robust performance of commodity assets despite the difficulties currently facing financial markets suggests further strong growth in 2008, Barclays Capital wrote in a recent report. Commodity investments are notoriously hard to track because of a lack of clear data. Barclays Capital bases its assessment of how much money institutional investors, such as pension funds and insurers, have piled into commodities on an analysis of reported figures for exchange-traded commodity products, medium-term notes and U.S. commodity-linked mutual funds. Institutional investors have classically used long-only commodity indexes, such as the S&P GSCI .SPGSCITR and the Dow Jones AIG .DJAIGTR, to gain access to commodities. Standard & Poor's told Reuters investment linked to its S&P GSCI index and other similar indices was estimated to rise to $150 billion in 2008, up from $110 in 2007. Dow Jones estimated $42 billion was tracking its index by the fourth quarter of 2007 out of a total of $145 billion using long-only index strategies. As commodities trade grows in sophistication, long-term investors have experimented with new approaches, including using hedge funds, which have traditionally been used by short-term speculators and take both long and short positions on the markets. This has played a part in boosting hedge fund interest, which has risen significantly. Data from the US Commodity Futures Trading Commission showed net long positions held by non-commercial players in the major US commodity futures markets hit an all-time high of more than 1.3 million lots on the final trading day of 2007.