The Euro and the Japanese Yen were the only major currencies to drop against the US dollar, with the single currency shedding $.0019 to $1.3469. Carry traders regained some ground through the afternoon, sending the greenback as much as ¥1.40 improved to highs of ¥115.49. A jump in demand for high-yielders likewise spread to the British Pound, which added as much as $.0094 before easing to $1.9838.
Given an increasingly dovish US Federal Reserve, analysts feel that it is only a matter of time before dimming growth prospects force the FOMC to cut domestic interest rates. Indeed, the Fed itself claims that growth—and not inflation—remains the main policy concern going forward. This is a critical shift in its stance on the economy, and market interest rate curves have responded accordingly. The implied yield on the December Eurodollars contract shows expectations of up to 50 basis points in rate cuts through 2007. Subsequent implications for the US dollar are fairly obvious: the greenback stands to weaken on worsening interest rate differentials against major trading counterparts. Of course, the direction of the US dollar will likewise depend on a wide range of exogenous factors. One of the critical components for dollar strength remains the performance of global equity markets and broader risk across financial asset classes.
The US Dow Jones Industrial Average reversed earlier gains, leading to a
modest dollar bounce at time of writing. Market participants sent the
closely-followed index 73 points lower to 13,006.16, with seemingly little in
the way of a break below the critical 13,000 mark. The S&P 500 was the
worst percentage performer of the three, losing 13 points to 1,434. Meanwhile,
the NASDAQ Composite traded 0.5 percent off to 2,491.