The US dollar moved lower in a highly volatile day of currency trading, as an earlier greenback bounce gave way so a substantial reversal on an impressive Dow Jones Industrial Average rally. An overnight continuation of yesterday’s dollar rebound initially sent the currency substantively higher ahead of the New York open, but sharply disappointing Durable Goods Orders results and dovish US Federal Reserve commentary easily forced a later dollar selloff.
An early morning speech by the Federal Reserve’s Vice Chairman Donald Kohn intensified speculation that the Fed would cut rates at its December meeting, leaving the dollar instantly lower on deterioration in yield differentials against major currencies. The Fed Vice Chairman emphasized that the central bank would move to protect the broader economy against the ill effects of financial market turmoil, claiming that the consumer should not bear the cost for poor decisions across financial and lending markets. In effect, he signaled that the Fed may be willing to look past the potential for moral hazard in order to forestall a significant deterioration in the domestic economy. And indeed, traders instantly increased bets that the central bank would cut interest rates at its December 11th meeting. According to CBOT-traded Fed Funds Futures, the current implied probability of a 25 basis point rate cut stands at a whopping 92 percent.
<span style="">Outlook for domestic interest rates took a further hit on the afternoon’s Federal Reserve Beige Book report, which reported anecdotal evidence that economic activity slowed across seven of the Fed’s 12 regional districts through mid-November. The remaining five districts pointed to “modest expansion or mixed conditions”—hardly an endorsement of optimism from influential central bank officials. “Downbeat” reports for consumer spending and “depressed” demand for real estate cut optimism for important sectors of the economy, and there were relatively few bright spots from the economic text. Indeed, the Fed Beige Book report was enough to send the dollar significantly lower against the euro and other major forex counterparts.
Further speculation for potential interest rate cuts forced similarly major price movements for the domestic equity market, with the Dow Jones Industrial average rallying an impressive 331 points to 13,289. The substantive reversal in risk sentiment forced the second consecutive day of strong rallies for domestic stocks, and the broader S&P 500 index improved a similar 2.9 perc3ent to 1,469. All the while, the NASDAQ Composite added a whopping 82 points to 2,663.
A sharp improvement in risk sentiment forced Treasury Bond yields significantly higher on the day despite a pull back in Fed interest rate expectations, with the 2-year Note yield adding 10 basis points to 3.17 percent.
[I]Written by David Rodríguez, Currency Analyst for DailyFX.com[/I]