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US Dollar Rebounds in NY Trade as Markets Stabilize

Monday, 17 March 2008 21:56:26 GMT  |  Terri Belkas and David Song, DailyFX.com

The US dollar plunged to new record lows during the Asian trading session as the Federal Reserve deployed an emergency 25bp cut to the discount rate in order to ease financial market fears. Indeed, JP Morgan’s purchase of Bear Stearns for $2 a share raised speculation that other financial firms may come to face a similar fate. However, the greenback subsequently recouped much of the losses, bringing the euro down from its record high of $1.5901 towards the $1.5700 level, while the British pound eased below $2.00 to test support at $1.9950. Meanwhile, the US dollar recovered from nearly 13-year lows against the Japanese yen to end the NY trading session near 97.50 yen.

Economic instability persists for the US as the Empire Manufacturing index fell to a record low, followed by a decline in Industrial Production and Capacity Utilization – bolstering the case that the sluggish economy is now in a recession. Economic activity continued to deteriorate as manufacturing activity in New York plunged to a record low of minus 22.2 from minus 11.7. Industrial Production dipped as well as the index dropped to minus 0.5 percent from 0.1 percent, with Capacity Utilization following as it declined to 80.9 percent from 81.5 percent. Foreign investments also declined as the TIC Flows dropped to $37.4B from $72.7B. Amid the pessimistic outlook for the US, foreign trade improved as the Current Account deficit narrowed for the first time in six years as rising exports reduced the deficit to minus $172.9B from minus $177.4B.

Increased volatility shook the securities market as it plunged during the morning session, but brush off most the downward pressures as the proactive Fed stepped in and lowered the discount rate to restore stability in the financial sector. Consequently, the DJIA was the only index to advance as it picked up 21.16 points to hold at 11,972.25, with JP Morgan Chase leading the index as it acquired Bear Stearns for $240M. The broader S&P500 retraced most of the day’s losses but held lower as it shaved 11.54 points by the end to leave the index at 1,276.60, with Bear Stearns taking the biggest hit as share prices lost $25.10.

US Treasuries advanced as the securities market struggled, and sent risk adverse investors seeking the safe haven of risk free bonds. As a result, the benchmark 10-Year yield plunged to 3.32 percent from 3.44 percent, with the 2-Year yield following as it fell to 1.36 from 1.48.

Looking ahead, all eyes will be focused on the FOMC rate decision at 18:15 GMT as we eagerly await another rate cut by the central bank, with most market participants expecting a 75bp cut, while bets of a 100bp cut continue to gain momentum as growth prospects continue to fall for the economy.

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