US Dollar Posts Largest Rally against Euro Since 2005 - Forex Speculators Fear Turn

The euro initially scaled fresh record-highs of $1.4347 in overnight Tokyo trade, but sharp tumbles in risky asset classes pushed the single currency to $1.4142 through time of writing. The British Pound saw similarly pronounced intraday volatility, scaling multi-month heights at $2.0548 before a substantial 260 point tumble. Other high-yielding currencies fell victim to a broader carry trade unwind, and the Japanese Yen was the only major currency to rally against the resurgent US dollar.

A virtually empty economic calendar left currency markets to react to shifts in overall risk sentiment, and a sharp downturn in European equity markets encouraged over-leveraged speculators to scale back extended forex positioning. Whether or not this proves to be a turning point for the US dollar is the key question at the moment, and our own technical analyst Jamie Saettele believes that this may be the beginning of a broader dollar reversal. (Click here for full report) The US economy will see little event risk through later week trade, and overall risk sentiment will remain king in the absence of fresh fundamental data. 

The Dow Jones Industrial Average initially followed its European counterparts and began an immediate selloff, but a later moderation in bearish pressure allowed the key index to rise 40 points to 13,561. Such gains pale in comparison to the 370 point rout seen Friday, but the pullback nonetheless bodes well for broader risk sentiment. The S&P 500 was similarly bid at +0.3 percent to 1505, while the NASDAQ Composite was the day’s strongest performer at +0.9 percent to 2,750.

The rebound in domestic stock prices allowed for a similar reversal in US Treasury Bonds, and yields on the interest rate-sensitive 2-year Note jumped 7 basis points to 3.85 percent. It is likewise of interest to note that expectations of further Federal Reserve interest rate cuts scaled back on the day, with the implied yield on the November Fed Funds Futures contract gaining 3 basis points to 4.55 percent. Such a yield reflects a 78 percent chance that the Fed will cut rates on its October 31 meeting—down from the 92 percent probability priced in on Friday. All else remaining equal, such pullbacks in Fed cut expectations would leave the US dollar bid through short term trade. 

Written by David Rodríguez, Currency Analyst for DailyFX.com