The greenback faces broad selling today as risk tolerance improves along with equity rallies. The equity rallies were primarily fueled by the gradual uncovering of stress test details and upbeat earnings. The same story of components have been the major market driver for the entire week .Today however, we threw some new factors into the mix including some of the only relevant economic data to be released this week. Even though markets are still net losers since Monday, the voice of optimism is still clearly audible. The Dow today advanced by about 100 points. The dollar was stronger against the pound and yen, but lower against the euro, cad, aussie, and kiwi.

Cautious optimism is the perfect catch phrase for today’s events. Things are getting better but it is unclear whether or not this is just a break in the storm, or the very beginnings of stabilization. The Federal Reserve seems to believe that we are a long ways off, while recent economic data and earnings reports are pointing toward stabilization. The Dow spent much of the day trying to find the answer to this unanswerable question. In the end, the bulls were barely able to maintain control. The euro and pounds got hammered in today’s session, losing more than 150 and 120 pips respectively. Surprisingly, dollar strength was not enough to keep USD/JPY from sinking further. Commodity currencies were mixed on the day.

Today’s markets have seen some of the most sustained inactivity in months. With US equity markets closed and new economic data at a minimum, the currency market decided to take a breath and allow time for this week’s developments to filter through. We are left with some time to further contemplate the notion of whether or not we are in the midsts of a bear market rally or a complete market reversal. The yen strengthens by less than 40 pips while the pound was virtually unchanged today. The euro advanced by about 60 pips, hardly making up for this week’s 400 pips in losses. Among commodity currencies, the big mover was USD/CAD, rising by about 20 pips.

The U.S. dollar has ended the week lower against all higher yielding currencies as the actions by Washington and leaders of the 20 largest economies have helped to restore risk appetite. USD/JPY which tracks the market’s sentiment broke 100, to trade at the highest level since November. The fate of the dollar in the week ahead will be largely dependent upon whether we are at a turning point in the global recession or if investors have been misled by false expectations.

The U.S. dollar capped the week off with a strong rally that may have set the tone for trading in the coming week. Despite a number of interesting political developments since Monday, the price action of most major currency pairs have been consolidative – up until now. Many factors have contributed to the sharp appreciation of the U.S. dollar, but for currency traders, their primary question is whether the rally can be sustained in the new and extremely busy trading week. Before even talking about the event risks, it is first important to remember that next week represents the end of the first quarter for many U.S. corporations and the end of the fiscal year for many Japanese companies. Therefore we may have a lot of action in the currency market that is related more to repatriation than economic fundamentals.

A new trend has emerged in the U.S. dollar this week courtesy of the Federal Reserve’s decision to start buying U.S. Treasuries. However judging from the price action across the financial markets, investors are not entirely convinced that the central bank’s actions will be enough to stabilize the U.S. economy. Stocks and gold prices have retreated after rallying on Wednesday while bond yields recovered. The U.S. dollar has also bounced but remains very weak. Given that the most significant consequences of the Fed’s action are higher bond prices (lower bond yields) and a weaker U.S. dollar, traders should not be distracted by the sell-off in U.S. equities. With no economic data or major announcements from the U.S. on Friday, profit taking has hit the currency market.

This past week has been marked by recoveries in both the currency and equity markets thanks to better than expected U.S. economic data and reports of profitability from banks. Although the price action that we have seen thus far is still in line with a bear market rally, the move higher has been a breath of fresh air for many investors. For the time being, the downtrend in the EUR/USD has been broken. Even though the currency pair continued to edge higher, it remains to be seen whether the strength can continue. There are a lot of economic data due for release next week, but not before this weekend 3 big event risks – the G20 Meeting, OPEC Meeting and Bernanke’s first ever on-the-record television interview as Fed Chairman.

All of the major currencies ended Friday’s trading session virtually unchanged against the US dollar. However the muted performance masks significant intraday volatility. The Euro for example raced to a high of 1.2754 following the US non-farm payrolls release but choked up nearly all of its gains on more uncertainty in the financial market. Similar price action was seen in USD/JPY. The currency pair dropped to a low of 96.58 in the European trading session but after a post payrolls rally it ended the US session above 98. The equity market was not spared from the volatility with the major indices falling to fresh 12 year lows before significant reversals. With no major US economic data near the beginning of the week, fear and uncertainty could lead to more volatility in the currency market.

The uncertainty expressed over the threat of a deep US recession and the third CitiGroup bail-out drove the dollar index to a three year high. Apparently, the dollar has maintained some of its safe haven status. Equities have finished a volatile trading day as a result, plummeting 125 points at the open, only to rally back. Unfortunately the bears won out in today’s battle at the tune of -60 points. The month of February reaped a toll on any possibility of a US rebound, as the Dow stumbled to lows not seen since the nineties. Hopefully, March will have more to offer

This morning, the Bureau of Labor Statistics reported that January was another month of massive job losses. For the third time in a row, more than 500k Americans lost their jobs. The market was looking for payrolls to drop by 540k, but instead they fell by a whopping 598k (Instant Insight on January Non-Farm Payrolls). Yet, currencies and equities traded like non-farm payrolls increased rather than decreased but this baffling response to a very negative number can be easily explained by the prospect of help from Washington.

Better than expected US economic data was like a breath of fresh air for the currency markets today. Producer prices fell less than expected last month while manufacturing conditions in the Empire State and Philadelphia regions improved. The dollar rebounded against the Japanese Yen indicating that risk aversion is abating, albeit modestly. The overwhelmingly pessimistic investors will not be easily swayed by a few pieces of secondary economic data, especially since all of the numbers are still in negative territory. Looking ahead, we will have another busy day in the currency market with US consumer prices, the Treasury International Capital flow report, industrial production and consumer confidence due for release.

Today’s trading comes across as mostly a denial of facts. Perhaps it is the jubilation that comes with the start of a New Year, or the low volume at the end of a holiday week, but today’s numbers certainly cast a concerning picture on an already weakened economy. Price action in the dollar is also equally perplexing, as the currency posts broad gains in today’s market. However, we warn that the facts in the marketplace will inevitably catch up with those who are once again convinced that the economy has hit the bottom.

Thin market conditions continue to dominate in the currency market on the eve before Christmas. Trading ranges for all of the major currency pairs have been relatively narrow, especially when compared to the large swings that have been characteristic of the third and fourth quarters of 2008. There were both upside and downside surprises in this morning’s economic data but even the upside surprises were numbers that reflected a contraction in US economic activity. This has fueled the mild sell-off in the greenback that began at the European open.

After several straight days of triple digit gains both EUR/USD and GBP/USD stalled in early European session as traders locked in profits ahead of the FOMC decision scheduled for 17:15 GMT later today. In relatively quiet night of trade the euro fell back from the 1.3700 level hitting a low of 1.3628 as data from the EZ showed continued weakness in both service and manufacturing gauges. Cable dropped even harder to 1.5210 after reaching a high of 1.5477 yesterday despite hotter than expected CPI numbers.