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.

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 US dollar traded lower today as safe haven demand subsided. New fiscal stimulus has been announced in Australia and Japan leading US investors to hope that similar help is around the corner. The full Senate is expected to vote on the $885 billion stimulus package this week and the prospect of a swift approval is having a big impact on the currency market. Politics is overshadowing economics and in that same vein, any delays in getting the money into the hands of Americans could derail the greenback.

The US dollar is stronger across the board today as risk aversion returns to the market. Like Florida weather, where it can be hot one day and cold the next but warm most of the time, we can occasionally see an improvement in the market’s risk appetite but the bias is still towards risk aversion. Traders have quickly realized that nothing new came out of the Fed’s monetary policy meeting yesterday and until we have another major announcement from the US government, currencies will be vulnerable to negative US economic data, earnings report and developments abroad.

The Federal Reserve is currently holding a two day monetary policy meeting and it will be interesting to see whether they are desperate enough to introduce radical programs that can incite the enthusiasm of investors. With interest rates virtually at zero, a rate cut is not expected, but the central bank is under pressure to take further action. So far, their effort which includes 500bp of easing has helped to prevent the recession from turning into a depression but it has yet to stabilize the economy. The latest string of economic data indicates that the US economy is still on a downtrend and headed lower. The FOMC rate decision tomorrow could be a nonevent for the US dollar, but if the Federal Reserve is desperate enough, they still have the power to surprise the markets.