The automaker bailout drama has exerted its toll on the financial markets. Last night, news that the bailout deal fell apart in the Senate drove the US dollar to a 13 year low against the Japanese Yen. Almost immediately, the dollar rebounded and its recovery accelerated after reports that the White House may provide assistance to the automakers by tapping the TARP funds. Stocks have rebounded from negative territory, but the unconvincing rally in both the currency and equity markets suggest that traders do not know what to make of the automaker bailout saga, which is sure to drag out into the New Year. With the Federal Reserve expected to cut interest rates on Tuesday, the US dollar could remain weak going into the rate decision.

Bank of England dropped the benchmark UK interest rate to 1.5% easing by 50bp as expected. The Monetary Policy Committee noted that the sharp drop in the pound provided additional stimulus to the UK economy tempering the need for more drastic rate cuts at the present time. The Central Bank acknowledged the severity of the UK recession stating that business and consumer confidence have declines markedly while noting that output is likely to drop sharply in the first half of 2009.

Tuesday’s FOMC meeting will be remembered for decades to come as the Federal Reserve brings interest rates down to the lowest level this generation has ever seen. With 2 realistic options on the table and economist and traders divided on how much the Fed will cut interest rates, the only certain outcome is significant volatility for the currency market. The US dollar is selling off aggressively going into the rate decision as traders realize that after tomorrow, the dollar will either be the lowest or second lowest yielding G10 currency. No matter how you look at it, an interest rate of 0.50 percent is just as bad as an interest rate of 0.25 percent.

The anti-dollar rally continued in Asian and early European trade today in the aftermath of yesterdays surprising -75bp cut by the Federal Reserve, but the pace of gains was decidedly more muted as currency traders booked profits in the wake of lackluster equity market performance and downcast economic data from UK.

The US dollar fell to a 2 month low against the Euro following the Federal Reserve’s decision to cut interest rates by 75bp to 0.25 percent. The greenback is now the lowest yielding G10 currency and for that reason, we should see foreign selling of US dollars exacerbate. At 0.25 percent or more specifically, a target range of zero to 0.25bp, foreigners may not find the yield attractive enough to warrant the risk. Despite the selling that we have already seen in the dollar today, this could just be the beginning of a longer phase of dollar weakness that may last into the first quarter of 2009.

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.

Tuesday’s FOMC meeting will be remembered for decades to come as the Federal Reserve brings interest rates down to the lowest level this generation has ever seen. With 2 realistic options on the table and economist and traders divided on how much the Fed will cut interest rates, the only certain outcome is significant volatility for the currency market. No matter how you look at it, an interest rate of 0.50 percent is just as unattractive as an interest rate of 0.25 percent.