Currencies: The US Dollar has generally been drifting lower against most major currencies over the past two weeks, although it has posted gains against the Japanese Yen. The Japanese Yen touched a five-month low against the Dollar on Monday.

Traders sold Yen earlier this week after the Group of Seven finance ministers and central bankers, meeting in Singapore over the weekend, failed to single out the Yen as being in need of correction. In the absence of action from the G-7, trading continued to be dominated by interest rate differentials.

A few traders had expected the G-7 to take some action against the Japanese Yen, given comments made by disgruntled European officials in recent weeks about the relatively weak Yen (relative to the Euro). Officials have been concerned about inroads made in European markets by cheaper Japanese imports.

We personally have not seen the G-7 (or its predecessor, the G-5) take significant action against any individual currency since approximately 1987. Therefore, we would have been surprised to see anything done this time around either. However, we see that "hope springs eternal …" (among traders, that is).

Comments made by US Treasury Secretary Henry Paulson, at the meeting in Singapore, were generally supportive of the Dollar. Paulson said, "a strong Dollar is clearly in our (the US') interest." When asked about the Chinese Yuan, which many analysts believe is undervalued, Paulson added that "significant issues aren't solved easily," implying he didn't expect the Chinese to make any significant moves regarding the Yuan.

On Monday, The US reported its current account deficit widened to $218.4 billion in the second quarter, wider than the deficit of $213.2 billion expected by economists. Many economists believe the US must devalue the Dollar to correct the deficit. However, Paulson came out against devaluation, attributing the deficit's magnitude to slower growth in Europe and Japan, relative to that in the US.

Economists are concerned about the ability of the US to finance the current account deficit. The US needs to attract approximately $2.4 billion in foreign investment every day (about $70 billion a month) to finance the deficit. On Monday, the US Treasury reported that net foreign security purchases fell to $32.9 billion in July. Economists had expected about $70 billion in net purchases.

July's level of net purchases may represent a low point in the pattern of foreign purchases, however. US Treasuries have undergone a massive rally in the past ten weeks, which accelerated after the Federal Reserve left interest rates unchanged in August. So the numbers released Monday precede this rally and do not really reveal whether foreign purchases were part of the rally.

On Wednesday, September 20, the Open Market Committee of the US Federal Reserve left interest rates unchanged for the second straight month. The Fed's target for the fed funds rate (the rate at which commercial banks loan reserves to other commercial banks) remained at 5.25 percent. Before August, the Fed had raised its target for seventeen straight months.

Based on trading in Fed Fund futures on the Chicago Board of Trade, traders currently believe there is only a 6 percent chance the Fed will raise interest rates again before the end of the year. Economic numbers released this week appeared to support this view: the producer price index, excluding food and energy -- so-called "core" producer prices -- fell 0.4 percent in August, while housing starts declined 6 percent, also in August.

In contrast to the Fed, economists think the European Central Bank could raise its own benchmark interest rate (currently at 3.25 percent) twice more before year-end. This should provide support for the Euro, Swiss Franc and British Pound vs. the Dollar.

Japanese interest rates should remain well below their US counterparts and we think investors will continue to buy Dollars, while selling Yen.

Financial developments took a temporary back seat to politics on Tuesday. A coup in Thailand had traders buying Japanese Yen. By Wednesday, however, the situation had cooled off enough to allow traders to reverse those positions to some degree.

Precious Metals: The slide in gold prices appeared to come to a halt, at least temporarily, at midweek as traders tried to bottom-pick the metal. Gold prices have declined more than twenty percent from mid-May, when the metal reached a high of $723 an ounce (prices fell to a low of $572.50 on both Tuesday and Wednesday).

Technically, gold seems to be extremely oversold, with its relative strength index falling below 30 (RSI ranges from 0 to 100 – over 70 is considered overbought; below 30 is deemed to be oversold). There appears to be some support for gold at $580.00.

From a fundamental standpoint, traders are betting that jeweler demand will pick up as the Western holiday season approaches. Jeweler demand generally accounts for 73 percent of total demand for physical gold. (Jeweler demand fell 16 percent in the second quarter).

Traders were also looking for a bounce after the passing of the deadline for gold sales by European central banks. The European Union allows central banks to sell no more than 500 tonnes of gold this fiscal year – ending September 30. So far, central banks have sold approximately 380 tonnes.

Silver prices have generally moved in line with gold, with support developing at $11.00 an ounce. Prices fell to $10.50 an ounce late last week, but have since rallied back above eleven dollars.