US Dollar Shrugs Off Import Price Inflation As Fed Tries To Calm The Markets

The US dollar is little changed against the majors, brushing off a jump in import prices, as the forex markets wobble amidst news that the Fed continues to “provide liquidity to facilitate the orderly functioning of financial markets,” battered hedge funds sell assets, and as Countrywide Financial said “unprecedented” disruptions could damage its financial position.

The Euro is moving to test the $1.3700 level at the time of writing, up from yesterday?s New York close $1.3676. Likewise, the British Pound saw moderate gains to take on $2.0250 from its morning low of $2.0152. Meanwhile, the carry trade-favorite Japanese Yen has started weaken, as risk aversion subsided somewhat during afternoon trading in the US, sending the dollar up to ¥118.38 from morning lows of ¥117.20.
US markets continue to be swayed by fears of a liquidity crunch, and it appears that the Federal Reserve?s move to pump up reserves has done little to reassure traders that tightening credit conditions will derail economic growth and stock market gains in the US and abroad. Early today, the Fed issued a statement saying that they would “provide liquidity to facilitate the orderly functioning of financial markets” and accepted a greater-than-expected $19 billion in three-day repurchase agreements after the federal-funds rate had risen to 6 percent, sharply above the Fed’s 5.25 percent target rate. The central bank followed this up by accepting another $16 billion in repurchase agreements later in the morning.
Meanwhile, economic data out of the US was sparse, with the greenback showing little reaction to July?s import price index, which helped to confirm Federal Reserve fears that inflationary pressures may still yet be looming over the world?s largest economy. Higher oil costs along with a weaker dollar supported a stronger-than-expected jump in the monthly gauge, which gained the most since March at a rate of 1.5 percent, creating the potential for a pick up in consumer prices on August 15th.
US stock markets continued their recently volatile price action, with equity indices spending most of most of the morning in negative territory as traders rushed to liquidate risky assets. The Dow Jones Industrial average was down 85.36 points at 13,185.32 - though the index fell as much as 300 points into the red before edging about 30 points into positive territory at one point. The New York afternoon also saw the NASDAQ Composite down 16.78 to 2,539.71, while the S&P 500 dropped 5.53 to 1,447.56.
Fixed income markets rallied in response to the day?s dreary news, with US Treasuries still fully pricing in a rate cut by the Federal Reserve in September. The benchmark 10-year Treasury Note rose 3/32 to 97 and 28/32, leading the yield on the contract to ease back 1 basis point to 4.772 percent. Meanwhile, yields on 2-year Treasury Notes, which are more sensitive than longer-term debt to changes in monetary policy, fell 2 basis points to 4.423 percent.