Dollar Volatile As Markets Adjust to FOMC - Which Way Next?

[B]Talking Points
• Yen: CA widens for 10th month yen weakens on bounce in stocks
• Pound: Rallies to 2.04 on carry flows but employment data weaker
• Euro: Stalls at 1.4700
• US Dollar: Trade Balance on tap[/B]

EURUSD turned most of its losses around in early London trade as global equity markets stabilized after yesterday’s near 300 point sell off in the Dow. US traders did not like the Fed decision to lower the discount rate by only 25bp rather than the full 50bp precipitating a very nasty tumble in stocks which in turn turned into carry trade liquidation in currencies helping to rally both the dollar and the yen.

However, the Asian markets did not really follow through and although the Nikkei ended down –112 points it actually rallied off the opening lows providing support for carry trade flows once again. By midday of Europe cable was back above 2.0400 and EURUSD hovered near the 1.4700 level. On the economic front the euro was boosted by better than expected EZ Industrial Production numbers which once again beat expectations printing at 0.4% vs. 0.2% forecast. In a testament to their productivity prowess, the regions producers continue to be the primary driver of growth despite the competitive disadvantages of higher exchange rates.

In UK the news was mixed as the number of people claiming unemployment benefits fell for the 14th consecutive month in November by 11,100, helping to bring the claimant count rate down to 2.5 percent - the lowest rate in 32 years. Nevertheless, average earnings growth actually slowed to 4.0 percent from 4.1 percent, suggesting that tighter labor markets aren’t necessarily driving wages higher which provides the BoE with room to ease rate further. Nevertheless, the UK labor data indicates that in spite of the credit crunch gripping the financial sector, UK economy remains remarkably resilient. Therefore the likelihood of any near term additional cut from the BoE becomes relatively remote.

Today’s the US calendar brings Trade Balance data which given the weakness of the greenback has the potential to contract more than the market expects. The news may be mildly bullish for the buck, but for today it appears that equity markets will determine its destiny.