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.

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.

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.

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.

Canadian labor markets deteriorated further in the month of February as 82.6K job disappeared against expectations of only 46K loss. The unemployment rate climbed a whopping 50 basis points to 7.7% from 7.2% just a month earlier. Full time employment fell by 110.9K jobs while part time employment rose 28.3K. This was the fourth consecutive month of job losses for the Canadian economy.

Canadian unemployment increased by -34K jobs versus forecast of losses of -21K as the unemployment rate inched by another 30 basis points to 6.6% from 6.3% the month prior.

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.