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.

Bank of Canada surprised the currency market by taking its overnight interest rate to a mere 25bp becoming the second lowest yielding currency in the G10 universe matching the rates of US and Switzerland.

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.

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.

Concerns about the US economy are growing as the Dow Jones Industrial Average erases all of its year to date gains, taking the US dollar down with it. The rally that we have seen in the first few days of trading will be difficult to sustain with all of the weak economic data that we expect in this month. Although the US government has thrown a lot of monetary and fiscal stimulus at the US economy, we may not see the fruits of their labor until the second quarter at the earliest. There is a major risk of a sharp drop in this month’s non-farm payrolls, retail sales and fourth quarter GDP reports and only after we have seen the last of depression like numbers can we begin to see a meaningful recovery in the US dollar.