The Commerce Department reported that the U.S. trade balance plunged by 29% to $40.4 billion in November, largely on a record decline in oil prices, assisted by much weaker demand for imports. At the same time, exports dropped 5.8% to $142.8 billion, led by weakening foreign demand for industrial supplies and capital goods.

“Trade flows have been crushed by the credit crunch, which has reduced demand for traded goods and services and made it more difficult for exporters and imports to obtain trade finance,” wrote Ian Shepherdson, of High Frequency Economics..

Ashraf Laidi, chief market strategist at CMC Markets, wrote that, “The 6% decline in U.S. exports is another sign of slowing global growth in the face of weakening global currencies against the US dollar.”

Traders still have one eye on Thursday’s European Central Bank meeting. Currency markets turned sour on the euro “at the start of 2009, and the credit headlines on European governments only reinforces this euro-skeptic market attitude,” wrote strategists at KBC Bank in Brussels.

And technicians at Brown Brothers Harriman wrote that, “Euro sentiment deteriorated further on the break of $1.3240, which points to a retest of the October low of $1.2331.”

Source: Dollar Still Surging Against Euro

“The dollar sentiment is so negative right now that any temporary improvement is not going to be taken very seriously, so long as it takes place before Thursday,” said Ashraf Laidi, of London-based CMC Markets. “That’s where the main point of focus for this week really is.”

Laidi referred not only to the results of Thursday’s meeting of the ECB, but also to the nonfarm payrolls data, which will also be released on that day. Could be a very volatile day, with diminished numbers of traders at their desks.

The buck had made some early gains but gave them back as the day wore on. The Institute for Supply Management reported its factory index rose to 50.2% in June from 49.6% in May, the first gain since January. The prices paid index — a measure of inflation — also rose, to 91.5% from 87% in the previous month, the highest level since 1979.

“When you look beneath the numbers, it still showed a pretty big slowdown in the US since unemployment was down and new orders were weaker,” said Boris Schlossberg, of Forex Capital Markets. “When the market took a closer look at this, it lost their initial enthusiasm and it was back to square one for the dollar.”

Source: Dollar Rises, but Falls Back

As with the metals, analysts were talking Fed yesterday. “The current dollar decline reflects an adjustment in traders’ expectations towards U.S. interest rates after the [Fed] policy statement added a phrase describing the ‘downside risks to growth’, while making a clear upgrade in its inflation alert,” said Ashraf Laidi, chief foreign exchange strategist at CMC Markets.

“Despite the Fed’s explicit recognition of higher inflation in the statement, we consider this language largely a rhetorical shift aimed at managing interest rate and currency market expectations rather than setting up for an actual rate hike,” Laidi added.

Most seemed to concur with that, as futures traders scaled back bets on a rate increase in the next three months. Interest-rate futures now reflect a 29% chance the Fed will keep borrowing costs at 2% in September, compared with just a 2% chance a week ago.

The Commerce Department released its final figures on growth and inflation for the first quarter yesterday, pegging GDP at a 1% annual growth rate and core CPI at 2.3%. The former was a 0.1% upward revision, the latter 0.2% higher than originally thought.

And the National Association of Realtors said re-sales of homes and condos inched up by 2% from April to May, slightly below expectations. But the median sales price was down 6.3% in May, year over year.

Source: Dollar Tanks on Fed Stance

There was no particular data to drive the price action on the day.

Some analysts cited comments from Bank of France Governor Christian Noyer, who told French radio that comments about the ECB being ready to take any “necessary” steps to bring inflation back down to its 2% target by 2009, were misinterpreted.

Noyer amended his remarks, saying that, “Movements can go both ways … I would never engage in a discussion about the future path of interest rates, simply because nobody knows.”

Today’s release of the key IFO business survey from Germany will be “a big test” for the euro, according to Ashraf Laidi, currency strategist at CMC Markets. “That survey has historically been the key dynamic that determined the euro’s moves higher.”

Last week, Citibank’s woes inexplicably pushed the buck higher, but that was not the case yesterday. When Bank of America reported that first-quarter profit fell 77% and credit-loss provisions jumped $4.78 billion, the market decided it was hearing bad news.

Are traders coming to terms with reality? Ashraf Laidi, of CMC Markets US, thinks so.

“Last week’s strong earnings were largely a reflection of relatively robust foreign demand and of the weak U.S. dollar. In the event that equities continue to rally simply on the notion that the ‘worst is behind us,’ they will risk diverging with the stark macroeconomic reality that is highlighted by soaring energy costs and rising unemployment,” Laidi wrote.

For its part, the euro got a boost when European Central Bank Governing Council member Axel Weber said that inflation is likely to remain elevated and hinted that the ECB might have to hike rates.

However, with the euro “so far unable to post new record highs, and the market seen as a bit overextended on the long side of the ledger currently, downside potential may be on the rise in the near term,” wrote currency analysts at Action Economics.