US Dollar Stages Last Minute Rally, DJIA Posts Biggest Gain Since March 2003

[DailyFx]

It was a wild day for the US dollar, as the currency started the day on a weak note versus most of the majors, but ended the day with a strong rally.



As we’ve seen over the past few days, the biggest moves seem to be occurring during the final hour of trading in the NY markets. The latest spark? News that the government is formulating a “permanent” plan to aid the financial markets along with new rules against short sales in the US and the Federal Reserve's $180 billion emergency liquidity injection helped to improve investor confidence. Indeed, at the very end of the trading day the US dollar recovered nearly half of its losses while the DJIA surged 3.6 percent, the biggest gain since March 2003. Likewise, fed fund futures shifted to price in a 78 percent chance of a 25bp cut next month, compared to 100 percent yesterday. Nevertheless, downside risks remain for the US dollar, as futures are still fully pricing in a 25bp cut before the end of the year. Furthermore, with the global credit crunch leading liquidity to drop substantially, we’re likely to continue seeing extreme volatility throughout the markets.

In economic news, the US leading economic index for the US fell more than expected in August at a rate of 0.5 percent, marking the second consecutive decline. Looking at a breakdown of the leading indicator, the sharp deterioration in the labor markets along with weak prospects for the housing market weighed heavily. The stock price and interest rate spread components were actually strong points this time around, but given the financial turmoil that has evolved recently, these factors could send the September reading of the US leading index down sharply. Looking ahead to Friday there will be no data on hand for the greenback, and thus, trading of US assets will likely remain contingent upon risk trends market-wide. My fundamental bias for the US dollar in the longer-term remains bearish, but if we see investor sentiment improve slightly on Friday, the currency could actually end the week on a strong note.

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