US stock markets finished the day strongly. For most of today’s trading, markets expressed uncertainty about the latest flood of economic reports, most of which did not improve as much as anticipated. By the end of the day, the Fed was able to step in and console investors as to the current stage of stabilization in the US economy. The Fed’s Beige Book, a tabulation of conditions reported within each Federal Reserve District opened with the usual words of concern but then introduced the notion of stabilization. The markets took this news and decided to rally with it by more than 100 points. Currency markets reflected stern euro weakness in turn for broad based pound strength. The dollar was higher against the yen but lost more than 100 pips against the Canadian dollar.

The U.S. dollar initially traded higher after the Treasury released details for the Public-Private Investment Program aimed at taking bad debts off bank balance sheets. Their actions help to create a floor under the toxic assets, reassuring global investors. However early gains in the U.S. dollar was overshadowed by the massive rally in the U.S. equity market. The 6.8 percent rise in the Dow or close to 500 point move reflected stronger risk appetite and growing demand for higher yielding currencies such as the Euro, Australian and New Zealand dollars at the expense of the greenback. If the Dow hits 8000, we could see a new 2 month high in the EUR/USD above 1.38.

A bank report that we read this week had an interesting line summarizing investors’ attitude towards the U.S. dollar over the past few months. They said that being long dollars means being long pessimism and we believe that this is a valid description of the recent price action in the currency markets. Today, the dollar weakened against every major currency except for the Japanese Yen. This weakness as baffling as it may seem is more of reflection of the market’s optimism than pessimism because equities are higher and gold prices are lower.

All eyes have been on Washington today with Fed Chairman Ben Bernanke testifying before Congress and Treasury Secretary Geithner releasing details on the US’ capital assistance program. The financial markets have been waiting for the details from the Treasury since they first announced the Financial Stability Plan and now investors have reacted positively. The Dow Jones Industrial Average turned positive temporarily after having been down close to 200 points this morning. Interestingly enough, the recovery in US equities has failed to have a meaningful impact on the currency market. The US dollar strengthened across the board and has remained strong going into the close of the US trading session.

The much anticipated announcements from Washington have triggered a dramatic turn in the currency and equity markets. With investors flocking back into the safety of US dollars and the Dow Jones Industrial Average falling 381 points, it is clear that investors are not satisfied with the Obama Administration’s new programs to unlock the credit the market and rescue the financial sector. If today’s announcements were to be measured by their ability to restore confidence in the financial markets, then the new President has failed miserably. Fortunately we are more optimistic and believe that economic stability will be restored under Obama’s leadership, but patience may be needed.

The theme in the markets this morning is a return of risk appetite. The US government has bailed out Bank of America for the second time, reminding investors that they are still here and ready to help the banking sector. BoA received another $20B to ease their absorption of Merrill Lynch.

EUR/USD got off to a strong start on the first trading day of the week, as optimism among Asian equity investors, whetted risk appetite pushing the pair to within a whisker of 1.3500 level in early European trade. Both Nikkei and Kospi propelled higher rallying more than 5% each on the day, boosted by a variety of factors from the expectations of bailout of US automakers to the more than 7% spike in Baltic Dry Goods index on Friday.