Fed Prevents Total Dollar Meltdown

Volatility heightened for the US dollar as the Non-Farm Payroll release signaled that the US economy is in a recession, but was able to fend off the downward pressures as the Fed announced a $200B infusion into the credit market to ease liquidity constraints. As a result, the US dollar picked up against most of the major currencies, and soaked in the biggest gains against the Canadian and the New Zealand dollar as commodity future prices eased during late in the session.

Against its European counterparts, the euro touched another record high of 1.5463 but failed to hold on to the gains as it fell lower against the US dollar, with the Swiss Franc telling the same story as it touched 1.0133 to later retraced the advances. The Japanese Yen also jumped in on the action as it rose near a 9 year record low of 101.42, but faced accelerating downward pressure as the securities market continued to take on more losses for the week. On the contrary, the British Pound and the Australian dollar were the only currencies to appreciate against the US dollar, with the British Pound taking the biggest bite out of the US dollar as the pair tested 2.02.

The Fed prevented a major meltdown in the financial markets as they announced a $200B infusion into the credit markets in order to resolve liquidity issues, and purged mounting pressures from the unexpected fall in employment. The Change in Nonfarm Payroll dropped for the second consecutive month as it fell to minus 63K, but the lowered temperament of the slowing economy was hampered as the Fed released their emergency solution prior to the employment release. Other parts of the labor market also showed weakening signs as Manufacturing Payrolls plunged to a five year low of minus 52K, with the unemployment rate unexpectedly falling to 4.8 percent, which raised speculation that the labor market is beginning to contract.

The stock markets got crushed as the lower than expected employment data curbed investor's risk appetite, and cause the markets to tally up more losses for the week. Consequently, the DJIA shed 145.23 points and dragged down the index to 11,893.69 points, with IBM leading the handful of winners while Chevron and Exxon shares took the biggest fall as oil futures held at 105.54. Among the broader indices, the S&P500 fell 10.97 points to hold off at 1,293.37 points, with CBRE Realty Finance shares picking up the most, while Thornburg Mortgage Inc continued to top the losers as the troubled firm is unable to meet $610M of margin calls.

US Treasury prices advanced as risk adverse investors sought after the safe haven of risk free bonds, and sent yield falling lower. The benchmark 10-Year yield fell to 3.54 percent, with the 2-Year yield following as it dropped to 1.52 percent.

Looking ahead, the rate decision by the Swiss National Bank will be the main focus for next week, followed by the Retail Sales and Consumer Price Index releases for the US. For next week, we expect downward pressures to hold for the US dollar as inflationary pressures persist to hamper economic growth, and expect the crumbling dollar to remain near its current record lows.

DailyFX

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