Since the start of trading on Sunday, the US dollar has had a wild ride following the news that Bank of America would buy Merrill Lynch, Lehman Brothers filed for bankruptcy, and insurer American International Group (AIG) sought $40 billion in capital.
At first, the US dollar weakened across the majors, but at the start of the European trading session, the currency rallied. However, toward the end of the NY trading session, the greenback started to pull back sharply again as risk aversion remains the predominant theme in the markets. This sentiment has led the DJIA to end the day down nearly 4.5 percent, while two-year Treasury notes saw yields plunge 49 basis points and fed fund futures shifted to price in a 72 percent chance that the Federal Reserve would cut rates on Tuesday afternoon. The big question is: will they actually do it? I don’t believe they will, as they’ve already attempted to address liquidity issues by expanding their lending facilities by accepting a broader range of collateral. However, the key to trading the US dollar on Tuesday will be the bias reflected in the Fed’s policy statement. They will likely note the substantial downside risks to growth, especially those stemming from financial instability, but if they go on to say that price pressures could ease in coming months, the markets will likely shift to price in rate cuts before year-end and send the US dollar lower. [B]My fundamental bias for the US dollar this week: bearish. [/B]
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Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.[/B]