US Dollar, Japanese Yen Surge as Risk Aversion Triggers 4% Decline in DJIA, Jump in Volatility

While many people were watching the inauguration of President Barack Obama, equity traders were focused on the sharpest drop in State Street Corp’s shares since 1984 as the world’s largest money manager for institutions reported a doubling in unrealized bond losses. With the exception of a few weeks in December, the US dollar and Japanese yen have both been driven primarily by risk appetite since mid-2008, as flight-to-safety and deleveraging work to strengthen the currencies. As a result, we must credit the gains in the greenback and the yen on Tuesday to lingering risk aversion, which was only exacerbated by State Street’s losses, as we also saw the Dow Jones Industrial Average end the day down a whopping 4.01 percent while the CBOE’s VIX volatility index surged higher. Over the next 24 hours, news that may impact risk trends will generally remain contained to the stock markets, as a variety of S&P 500 companies will be issuing earnings releases, including banks like Northern Trust and computer powerhouse Apple.