The decline of the banking sector was the direct result of an all-consuming increase in risk aversion, fear, and ultimately, interest rate spreads. So why did the US dollar gain 24 percent between mid-July and November? Treasuries and the US dollar became the safe-havens of choice, and funds flowed en masse toward these assets as the CBOE’s VIX Volatility Index climbed from about 20 in July to a record high of 89.53 on October 24, beating out the highs reached following the collapse of LTCM in 1998 and after the terrorist attacks on September 11, 2001.
Stock market volatility has since died down, as evidenced by the first decline in the CBOE’s VIX index below 40 since October, but forex market volatility, as measured by the DailyFX VIX index, remains near record highs. The implications of this became clear today as lower liquidity helped to exacerbate choppy price action in the EUR/USD and GBP/USD pairs. This actually had more to do with extreme movements in EUR/GBP, which will be discussed below. Meanwhile, the greenback ended the day up less than 1 percent against the euro, Japanese yen, and Swiss franc, but tumbled versus the British pound (-1.3 percent ), New Zealand dollar (-1.5 percent), and Australian dollar (-2.33 percent). US economic news had little to do with the moves, and the commodity currencies had the more than 10 percent surge in oil prices to thank for their gains.
Looking at the US data on hand, US initial jobless claims initially appeared rather optimistic as they fell 94,000 to 492,000 during the week ended December 27. However, these numbers are actually skewed because of the shortened holiday week and for what it's worth, employment reports for the last two weeks of December should be ignored for this reason. Indeed, the surge in continuing jobless claims for the week ended December 20 provides a more accurate view of the US labor markets, as they rose to a fresh 26-year high of 4,506,000. Looking back at historical data, the steady climb in claims for unemployment benefits logically suggests that the unemployment rate for December will likewise jump upon release on January 9. The markets will be closed on January 1, but on Friday, the Institute for Supply Management’s (ISM) index of manufacturing conditions will hit the wires. The index for the month of December may fall to the lowest levels since 1982, while the record low of 29.4 from May 1980 looms close below. Overall, the report may only impact the US dollar if it is surprisingly optimistic, as the Federal Reserve has already cut the fed funds rate to a record low range of 0.0 - 0.25 percent from a six-year high of 5.25 percent in September 2007 and has no room for maneuver from a traditional monetary policy perspective.
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