The US dollar surged against its European counterparts, as credit fears rose to the surface once again after BNP Paribas suspended three funds and the ECB responded by pumping liquidity to calm the markets. The Federal Reserve subsequently followed suit by adding $12 billion in temporary reserves via 14-day repurchase agreements. Meanwhile, the same news led the greenback to plunge against the Japanese yen as a return to risk aversion led carry trades to sell-off rapidly. (See more on BNP Paribas and the ECB here)
The Euro plummeted against the US dollar from its Asia session high of $1.3816 to the lowest in a week, hitting $1.3655 before recovering to the $1.3700 level through time of writing. The British Pound likewise saw pronounced declines, challenging support at the psychologically significant $2.0200 mark before making it back to $2.0282. The carry trade-favorite Japanese Yen was the only major currency to gain against the greenback, with the dollar dropping ¥1.00 from yesterday?s New York close to ¥118.66.
The biggest market mover for the US dollar today was in fact, out of Europe, as the financial markets were hit double-time by news that BNP Paribas suspended three funds and the ECB pumped up liquidity to calm the markets. Risk aversion returned with a vengeance after BNP Paribas, France’s biggest bank, stopped withdrawals from three investment funds saying, “the complete evaporation of liquidity in certain market segments of the US securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating.” The news prompted the European Central Bank to loan 94.841 billion euros ($130.2 billion) in emergency funds to European banks for the first time since just after the terrorist attacks of September 11, 2001. The Federal Reserve subsequently followed suit by adding $12 billion in temporary reserves via 14-day repurchase agreements. With US subprime problems clearly spreading to other parts of the global economy and leading liquidity and credit to tighten rapidly, carry trades have sold off as traders become increasingly risk averse.
Meanwhile, economic data out of the US was sparse, with only second-tier labor market reports on tap. Initial jobless claims for the week ending August 4th rose a greater-than-expected 7,000 to 316,000, which helped push the four-week moving average up to 307,750 from 306,000. The report only confirms the weakening status of the US labor market following last week?s dreary non-farm payrolls survey, which was released below estimates and bumped the unemployment rate up to 4.6 percent. Although companies may not be aggressively thinning labor forces out yet, higher costs and slower demand may lend to some near term downward pressure on overall employment.
US stock markets continued their recently volatile price action, as traders rushed to liquidate risky assets with the Dow Jones Industrial average down 144.46 points, or 1.06 percent, at 13,513.40 after showing an initial plummet of 1.8 percent at the market opening. The NASDAQ Composite took a hit as well, falling 19.63 to 2,593.35, while the S&P 500 dropped the most of the three indices in percentage terms, plunging 1.35 percent, or 20.16 points, to 1,477.33.
Fixed income markets rallied in response to the day?s dreary news, with US Treasuries now fully pricing in a rate cut by the Federal Reserve in September. The benchmark 10-year Treasury Note surged 19/32 to an impressive 97 and 22/32, leading the yield on the contract to plummet 8 basis points to 4.799 percent. Meanwhile, yields on 2-year Treasury Notes, which are more sensitive than longer-term debt to changes in monetary policy, fell 15 basis points to 4.507 percent.
[B]Written by Terri Belkas, Currency Analyst[/B]