Euro Sets Record Highs against Dollar on Subprime Fears, Equity Tumbles

The Euro saw peaks of $1.3842 before settling to trade at $1.3812 through time of writing. British Pound bulls likewise sent Cable to 26-year highs of $2.0568, while a modest pullback saw the Cross-Atlantic currency pair move to $2.0544. Further rallies were limited by a simultaneous advance in the Japanese Yen, which saw the USDJPY lose as many as 130 points off of daily highs.

There was no new economic data out of the US on the day. Yet markets experienced a significant jump in price movements across the board, as the S&P 500 Volatility Index (VIX) added a whopping 2.26 to weekly highs at 17.48 percent. The closely-monitored VIX serves as an accurate measure of overall risk aversion across financial asset classes, which likewise explains the sharp drop-off in the popular forex carry trade. In fact, a simple correlation study shows that the high-yielding Australian Dollar-Japanese Yen currency pair keeps a strong -0.55 correlation with the measure. Though equity performance hardly dictates every movement in the JPY, experience has clearly shown that stock market tumbles have had far-reaching effects on the incredibly oversold Japanese currency. It will subsequently be important to watch the performance of Asian markets through Sunday night’s open; extended declines would only further fuel the JPY short-covering. 

The Dow Jones Industrial Average stole headlines for all the wrong reasons, losing a substantial 160 points to 13,840 through time of writing. Broader S&P 500 stocks fared no better, as the index shed 1.2 percent to 1,534.63. Yet declines in the Dow and S&P still fell short of the drop in the tech-heavy NASDAQ Composite, which moved 1.34 percent lower to 2,683.54. Earnings reports and renewed talk of Subprime lending fears were the primary culprits for the significant losses. Disappointment in Google Inc.’s Second Quarter numbers sent the high-flyer 5.0 percent worse to 521.00, while Caterpillar Inc. tumbled 7.75 percent to 80.24 for much the same reason. Likewise significant, an early speech by St. Louis Fed President William Poole reignited market jitters on the lending crisis. The official said that the subprime lending issues were pronounced enough to dampen outlook on the broader housing market. Though the speech was largely a restatement of what was already known, the text teamed up with disappointing earnings reports to send equities lower.

Fixed income markets saw significant rallies on a flight to quality, with the US 10-year Treasury Note up ½ points to 96 and 19/32. Yields took a hit on the day, breaking below the key 5.00 percent mark to trade at 4.94 percent at time of writing. Such rising bond prices and falling yields bode poorly for the potential of a US dollar retracement, with the greenback remaining relatively subdued despite signs of stabilization across markets.