For readers of the Daily Currency Focus, it should be no surprise that the dollar has continued to weaken. On Wednesday, we said that the actions by the Federal Reserve have cemented the downtrend in the U.S. dollar. Given how currency traders have responded to previous Quantitative Easing threats and announcements, the EUR/USD could realistically hit 1.40 (see charts). Although equities have given back its gains and bond yields have rallied, the moves in the currency and commodity markets indicate that the Fed’s actions will have a lasting impact on the financial markets. As we look forward to more dollar weakness, it is worthwhile to consider how a weaker dollar impacts the global economy.

Another night of risk aversion has lifted the yen to a six week high against the euro and a four week high against the buck as WHO raised the alert status of the swine flu crisis from 3 to 4. Keiji Fukuda, assistant director-general for health security and environment noted that the increased threat level “signifies that we have taken a step closer to pandemic. It is also possible that as the situation evolves over the next few days we could move into Stage 5.”

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.

This week’s primary influence has been deeply rooted in speculation over stress test results as well as the flood of earnings reports that, so far, indicate that profits are on the rise. These mixed signals have been too much for the Dow to bear. The index was sent back and forth between positive and negative territories. Within the last hour of the trading day, the Dow plummeted off of 60 point gains to end the day down more than 80. Nevertheless, the market may remain range bound until the entire earnings season has played out and all stress tests have been made public. Until this time we may be subject to a constrained trading pattern. The currency markets choose the pound to be the big loser of the day. Otherwise, the dollar rallied against the commodities currencies but fell against the yen and euro.

The dollar continued to strengthen against the high beta currencies throughout the Asian and early European trade today as risk aversion and mixed economic news continued to weigh on euro, pound and Aussie. With little economic data on the calendar the pro-dollar flows that have dominated trade since the start of the week continued, but EUR/USD managed to hold the 1.2900 figure despite several attempts over the past few days to take the pair lower.

The ZEW survey of investor expectations improved markedly in April jumping to 11.8 from -6.5 the month prior and helped lift the EUR/USD to session highs of 1.2990 in early European trade. Investors were encouraged by signs that the contraction in the 16 member union was beginning to flatten out and undoubtedly were influenced by the strong recovery in the equity markets in March.

Global equities took a severe pounding in today’s trading. For the U.S., concerns over another wave of banking crises seem to take hold of investor’s sense of fear and uncertainty. The Dow was sent down more than 3.0%, while crude prices plummeted nearly 9.0% on the day. With economic data at a minimum for this week, the primary driver in the U.S. will remain to be the flood of corporate earnings. While news has been primarily promising thus far, many are still convinced that this will be the seventh consecutive monthly decline in corporate earnings. Accordingly, the standard risk adverse formation took shape in favor of dollar and yen strength. Crosses bared the brunt of the selling, sending AUD/JPY spiraling down by more than 4.5%.

The euro sliced through the 1.3000 level while the pound dropped below 1.4600 in early European trade as concern over ECB policy actions and some risk aversion flows in European equities weighed on high beta currencies at the start of the week. Comments over the week-end by ECB chief Jean Claude Trichet suggested that the central bank may lower rates by another 25bp to 1.00 percent while ECB Executive Board member Lorenzo Bini Smaghi said the bank’s benchmark 1.25 percent interest rate is “very close” to its floor.

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.

China’ s GDP printed slightly weaker than expected at 6.1% versus 6.3% forecast – its slowest pace of growth this decade, but despite the lower headline number underlying fundamentals suggest that the Chinese economy continues to expand at a healthy pace.

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 euro remained under pressure throughout Asian and early European trade dogged by risk aversion flows and mounting concerns over the lingering economic contraction in the 16 member union while the pound continued to rally approaching the key psychological figure of 1.5000. A story in UK Telegraph noted that fully one third of European junk bond credits could default on their debt as the export driven region sees no signs of pick up in demand.

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.

For the second day in a row, the U.S. dollar has appreciated significantly against the Euro and is also trading higher against the New Zealand dollar and Swiss Franc. However, the extent of today’s rally in the greenback basically ends there. The dollar is practically unchanged against the British pound and Australian dollars and is trading lower against the Canadian dollar and Japanese Yen. The 2.3 percent sell-off in U.S. equities coupled with the outperformance of the two lowest yielding G7 currencies indicates that risk aversion is the dominant theme. Yet, with no major U.S. economic data or market moving news over the past 48 hours, traders may be wondering, what changed. As recently as last week, investors were optimistic about a turnaround in the global economy following the more substantial outcome from the G20 meeting.

Over the past week, the Australian dollar staged an impressive rally as upside surprises in economic data fueled expectations that interest rates will be left unchanged for the second time in a row. Since March 10th, the Australian dollar has appreciated from a low of 0.6340 to an intraday high of 0.7228 on Friday. The Reserve Bank of Australia has a monetary policy meeting on Monday evening NY time, Tuesday morning in Sydney and the outcome of the meeting will determine whether the Australian dollar is able to sustain its gains. Currently, the market expects the RBA to leave interest rates unchanged, but some people believe that the RBA could cut rates by as much as 50bp, which means the upcoming rate decision, could be a close one. Although, leaving interest rates unchanged has become a common practice of many central banks these days, what sets Australia apart is that interest rates are not at zero, leaving the RBA with room to ease. At 3.25 percent, the country currently has the highest interest rate amongst developed countries.

The next 48 hours in the foreign exchange market should be very interesting as we look forward to three significant events that could trigger massive volatility in the currency market independently, let alone collectively. After some big moves earlier this week, most currency pairs have consolidated as traders wait for the European Central Bank interest rate decision, the G20 meeting and the U.S. non-farm payrolls report. The U.S. dollar strengthened against the Euro and Swiss Franc but lost value against all of the other major currencies. This consolidation should just be a precursor to a bigger move.

The Tankan survey showed that business sentiment amongst big manufacturers fell to a record low as economic conditions continued to deteriorate. The Large Manufacturers index declined to -58 from -24 the period prior and printing worse than the markets -55 forecast. The gloomy sentiment reflected the very tough operating conditions for Japanese corporations whose margins are squeezed both by massive collapse of global demand and by the persistent high valuation of the yen.

The last trading day in the first quarter of 2009 has ended with a bang. The U.S. dollar sold off against most of the major currencies as repatriation flows come to an end. U.S. economic data was weak, but not a game changer and therefore currency investors chose instead to focus on the positive implications of Japan’s stimulus package and the IRS’ new tax break for U.S. car buyers. The currencies that are performing the best against the U.S. dollar are the ones whose central banks are not expected to adopt quantitative easing, namely the Australian New Zealand dollar.

Over the past 24 hours, it has become increasingly clear that the bear market rally in currencies and equities is over. U.S. stocks plummeted close to 4 percent sending investors back into the safety of the U.S. dollar and Japanese Yen. Renewed concerns about the U.S. economy was the primary catalyst for the risk aversion but repatriation also added to the upside pressure in the two lowest yielding currencies. With 24 hours to go before the end of the quarter for most U.S. companies and the end of the fiscal year for the Japanese, repatriation has been particularly strong as companies bring money home to window dress their balance sheets. The U.S. dollar strengthened against every major currency except for the Japanese Yen.

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.

UK Retail Sales printed much worse than expected coming in at -1.9% vs. -0.3% forecast as UK consumers faced with the worst labor market conditions since the early 1980’s sharply cut their spending in February. The news was not totally surprising given the weakness in the overall UK economy and the steep drop in CBI March Distributive Trades survey yesterday.

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.

With no fireworks from this weekend’s 3 big event risks, the rallies in the currency and equity markets are fizzling. Having been up more than 150 points intraday, the Dow Jones Industrial Average ended the U.S. trading session down 7 points. This lack of follow through was replicated in the foreign exchange market with the Euro and British pound giving up earlier gains. Promises can only take the markets so far and the lack of concrete actions by the G20 has disappointed investors. Although we have previously mentioned that bear markets can rally as much as 25 percent, today’s intraday reversal is worrisome. Looking at the economic calendar this week, there is not much event risk to energize investors

The euro and pound rose on the first trading day of the week as risk appetite returned to the currency market after US Treasury Secretary Tim Geithner promised to release details of a new plan to use a private and public partnership funds to remove toxic assets off the balance sheets of US banks. Both Asian and European equities rose providing a strong bid tone to the risk currencies. Cable rallied through the 1.4100 handle and euro approached the psychologically key 1.3000 level by midday European trade.

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.

With U.S. equities rising more than 5.5 percent today, one would expect the improvement in risk appetite to drive the U.S. dollar lower against all of the major currencies. Unfortunately we did not see a broad based sell-off in the U.S. dollar. The greenback only weakened against the Euro and commodity currencies because investors continued to bail out of British pounds and Swiss Francs. It is also interesting that the EUR/USD is well off its highs indicating that the market’s appetite for dollars has not waned dramatically. The catalysts for today’s rally are not convincing and the moves in the currency market are fizzling, which suggests that we have witnessed nothing more than a bear market rally.

Trade data from both Germany and France printed worse than expected suggesting that Eurozone economic output figures will likely prove to be weaker than the current government estimates. German Trade Balance recorded a 8.3 Billion euro surplus less than the 10.0 Billion number that the market was expecting while French data showed a deficit of -4.5 Billion against forecasts of -3.0 Billion.

Markets are once again entrenched in a fear induced environment. Global equity markets are spiraling downward on continued disruptions in the stability of the global financial system. The promise of stability is nowhere to be found, as situations are only worsening despite continued governmental efforts. The concerns over the financial sector in particular have added to investors fears. Between the British nationalization of Lloyds Banking Group and AIG’s proposal for another bail-out, the survivability of financial companies is in question. Currencies have reacted with a determination on dollar strength. As the yen continues to lose its status as safe haven, the availability of a risk-free environment is almost completely limited to the United States. The dollar advanced against the Euro, Pound, Yen, Canadian dollar, Australian dollar, and New Zealand dollar.

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.

Things will get very interesting in the currency market over the next 48 hours. The Bank of England and the European Central Bank will be making interest rate decisions on Thursday and non-farm payrolls are due for release in the US on Friday. Alone, any one of these releases could trigger significant volatility in the currency market but together, they could easily lead to major breaks especially since the EUR/USD and GBP/USD have been fluctuating within tight trading ranges. The US dollar traded lower against all of the major currencies except for the Japanese Yen. Risk appetite has improved thanks to a new stimulus package for China, more details on the Treasury’s $75B mortgage plan and a stronger than expected service sector ISM report. The Fed’s Beige Book report signaled worsening economic conditions across the nation, but that failed to cause a dent in the currency or equity markets.

The US dollar extended its gains against the Euro, British pound and Japanese Yen as the key players in the recovery story disappoints the market. Overall the price action in the currency market has been muted and the dollar lost ground against other major currencies such as the Australian and New Zealand dollars. US economic data was weak but the dollar rally continued as traders focused on external rate decisions. The central bank of Australia left rates unchanged while Canada cut theirs by 50bp; next up are the Eurozone and UK rate decisions, both of which are expected to lower interest rates.

The Reserve Bank of Australia kept rates on hold at 3.25% surprising the currency market which expected a rate cut of 25bp or more. The move came on the night when the country reported much better Retail Sales of 0.2% versus -0.5% expected as well as in improved Current Account number of -6.5 Billion versus forecast of -7.3 Billion deficit.

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.

Currencies and equities have strengthened across the board suggesting that risk appetite may be improving. The dollar, which has been a refuge for safe haven flows, fell against all of the major currencies except for the Japanese Yen. In fact, the rally in USD/JPY has been voracious with the currency pair rising 2.5 percent to an 11 week high. The move today has been driven by a variety of factors, none of which in our opinion are meaningful enough to sustain the rally.

UK Retail Sales posted a gain of 0.7% versus forecast of 0.0% surprising the currency market which was geared for a much weaker result. December's data was also revised upward coming at very healthy 1.6% rate. The news confirms the sharp rise in BRC retail sales earlier in the month and suggests that UK economy may be more resilient than the market current dour consensus.

Capital flight has driven the US dollar higher. On a day when President Obama signed the Economic Stimulus Package into law, the banking turmoil in Europe and the resignation of Japan’s Finance Minister has turned investors away from other major currencies. Even though the greenback is yielding next to nothing, investors are willing to park their money with the US government as long as they keep it safe. The lack of negative game changing news from the US has been very positive for the US dollar. The greenback and gold prices have been moving in tandem since January 14th. This unusual correlation is actually sending a strong message to currency traders.

It is a dollar story in the foreign exchange market today as the greenback rises against every major currency. Although earlier risk aversion contributed to the strength of the US dollar, the underperformance of the Japanese Yen suggests that revenge of the low yielders is not the theme in the currency market. Since we are still waiting on the economic stimulus package, the market has shifted its focus away from politics and back onto economics. The comments about sovereign debt ratings by ratings agency Moody have spooked currency traders.

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.

Over the next 24 hours, the crisis of confidence will be tested. A number of speeches and announcements are expected from the Obama Administration ranging from the President himself, the Treasury Secretary and the Chairman of the Federal Reserve. The big test tomorrow will be whether or not investors are satisfied with the government’s efforts. Is the rescue plan enough to turn around the US economy or will the critics crush any optimism? The US dollar is trading lower against all of the major currencies suggesting that forex traders are holding out hope that Obama’s plan is well received but this same sentiment is not being shared by equity traders.

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.

Over the past 6 months, being long US dollars has been one of the best trades in the currency market but as the dollar extends its gains, many traders wonder how much further it can rise. In the currency market, trends can last much longer than anyone would normally anticipate especially if it is driven by fear. As humans, we run from uncertainty and not towards it. Risk aversion has been pushing investors into the safety of the US dollar and out of higher yielding currencies. When Main Street reads in the papers tomorrow about the slowest pace of economic growth in 26 years, their shock could turn into more selling. Next week, we also have the US non-farm payrolls report due for release. A sour mood could hang over the markets for most of the week as traders fear that another 500k jobs were lost in the month of January. The only thing that could improve risk appetite and give investors a reason to cheer would be if the Senate passes President Obama’s economic stimulus package.

German unemployment rose to a much greater than forecast 56K job loss versus projections of 32K loss and the month prior results of only 18K loss. This was the second consecutive month of increase in unemployment rolls suggesting that the economic contraction in Eurozone’s largest economy is beginning to have a direct impact on the labor market. The rapid pace of deterioration in labor demand bodes badly for future economic growth in the region as consumer demand is sure to suffer further.

The drop in the GBP/USD at the start of this week has been nothing short of astonishing. In less than 48 hours the pair erased more than 1000 points off its price depreciating by more than 6% against the dollar. Although cable has been in decline since the turbulent markets of last fall, this latest freefall carries a whiff of true panic about it as markets fear that that UK government spending schemes to rescue the country’s ailing banking sector will put unsustainable stress on the Treasury.

Standard and Poors lowered the sovereign bond rating on the Kingdom of Spain from its highest level of AAA to AA+. S&P noted that “Current economic and financial market conditions have highlighted structural weaknesses in the Spanish economy that are inconsistent with a AAA rating.”

The euro started off the new week the same way it ended the last one – by sliding against the dollar as focus in the currency shifted towards the ECB. The central banker in Frankfurt are facing escalating pressure to lower rates in light of the severe slowdown in economic activity in the Eurozone. In contrast , Friday’s US Non Farm payrolls, though horrid at -525K, were far better than the whisper number of -700K and as a result support for the greenback stiffened as the data refused to confirm the dollar bears worst expectations.

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.

With no US economic data on the calendar today, the dollar weakened against every major currency except for the British pound. Trading continues to be very thin with commodities being the only products that are really moving. The tensions in the Middle East have driven oil and gold prices higher. US stocks also gave back Friday’s gains and remained contained within its week long trading range.

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.

The US dollar appears to be unfazed by this morning’s mixed economic reports. Thin trading conditions continue to dominate in the currency market, leading to inconsistent trading for the US dollar. The greenback strengthened against the Japanese Yen and British pound but weakened against the Euro. The latest reports on the US economy were weak but not as weak as the market had expected. There was the potential for really bad numbers and the fact that they did not materialize has actually helped the dollar.

It is the first trading day of what is typically the least liquid period in the financial markets. As a result, there was no consistent trading pattern in the US dollar today. The greenback weakened against the Euro but gained strength against the British pound and Japanese Yen. We still believe that the US dollar has hit a top and could be at the cusp of a major reversal. The EUR/USD’s resilience to the US stock market sell-off indicates that we are finally seeing the weak outlook for the US economy reflected in the weakness of the US dollar. In 2009, the greenback may no longer be the market’s safe haven currency of choice as yields on Treasury bills sit at zero to negative levels.

It has been an extremely volatile week in the currency market. On Monday, the EUR/USD was trading at 1.3364 and shortly after the European open on Thursday it hit a high above 1.47. However since then it has reversed violently to end the week back at 1.39. This type of price action is characteristic of an illiquid market that is uncertain about how to react to the drastic measures taken by central banks around the world. There was no US economic data released today, but there are reports that the White House has given $17B in loans to the Big 3 automakers. The US dollar strengthened against all of the major currencies except for the Japanese Yen. Next week is a lightened trading week with the Christmas holiday. US economic data is therefore jammed into Tuesday and Wednesday. We expect the final figures for third quarter GDP, housing market numbers, personal income, personal spending and durable goods next week. The data should continue to reflect the weakness of the US economy.