What to expect from a fundamental and technical basis for the US dollar, Euro, British pound, Japanese Yen and other major currencies in the year ahead.

Trading in equities very closely mirrored yesterday’s volatile session. It is clear that investors are still uncertain, as direction in the Dow has been largely range-bound. Equities have swerved between two extremes, at one time positive by more than a hundred points. Even though the excitement and enthusiasm behind the newly proposed relief program has managed to give equities a new leg, we are still undeniable seeing the levels of concern that have pervaded the markets for most of last year. This level of fear was a big factor that led to the original implosion of the equities market. Trading in the dollar has been likewise mixed, with strength against the euro and yen, but weakness against the pound and commodity currencies.

The resonance of the New Year is starting to show its true colors at the start of the first full trading-week this year. The Dow finished a volatile day lower, in some ways ruining the sense of stability that pervaded in last week’s market. Volatility in equity prices was complemented by some extreme moves in the fx markets. Looking at today’s biggest percentage movers we can see the sheer magnitude of price action today, with some moves extending to more than 3.0%. The dollar in particular was heavily mixed across the board. We have seen some substantial gains against the euro and yen, in conjunction with weakness against the pound and commodity currencies. Today’s trading was a truly unorganized and unpredictable force.

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.

The US dollar sold off modestly today on stronger European economic data and weaker US data. The dollar’s weakness was seen against every major currency except for the Canadian dollar which followed oil prices lower. Trading remains extremely quiet in the foreign exchange market and any moves that we have seen thus far are still nominal. The only currency pair that is really moving is the EUR/USD, but thin liquidity could be exacerbating the pair’s trading ranges.

It has been an exceptionally active year in the foreign exchange market as currency volatilities hit record highs. In the first half of the year, everyone was worried about how much further the dollar would fall but in the second half of the year the concern became how much further the dollar would rise. More specifically, after hitting a record low against the Euro in the second quarter, the US dollar surged to a 2 year high against the currency in the beginning of the fourth quarter. From trough to peak, the dollar index rose more than 23 percent in 2008.

With Japanese markets closed for Emperors birthday, currencies spent the night in quiet pre-holiday trade essentially marking time until dealing desks close tomorrow evening for the Christmas holiday. The euro made another run at the 1.4000 level boosted by better than expected French consumer spending and Current Account data, but the rally fizzled into the early European session as traders continued to square up their books.

With dollar denominated assets yielding next to nothing, we have continued to see money flow out of the US dollar. The greenback fell to the lowest level against the Euro since September and dropped to a new 13 year low against the Japanese Yen. The losses have been even more staggering since the beginning of the month. The dollar has fallen 14 percent against the Euro and 8 percent against the Japanese Yen. This significant sell off begs the question How Much Further Can the Dollar Fall? If you watched the price action in the currency market this past year, you will know that trends dominate. With only 2 weeks until the end of the year, we could be stepping into a longer phase of dollar weakness.

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.

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.