US Dollar At Record Low, Oil At Record High – Will These Extremes Moderate Next Week?
The US dollar fell to yet another record low against the Euro on Friday as traders remain overwhelmingly bearish on the greenback. However, the markets have remained bullish on nearly everything else, including commodities. In fact, oil continued to trade near record highs above $90/bbl on Friday amidst escalating tensions between the US and Iran as well as Turkish warnings of a broader assault on Kurdish militants in Iraq. The US dollar will find little support given the sharp rally in oil, and economic data isn’t helping the case either. The University of Michigan Consumer Confidence survey exacerbated fears of a consumer-led recession in the US, as the October reading was unexpectedly revised down to 80.9 – the lowest since June 2006. Stock market tumbles undoubtedly played a hand in the deterioration in sentiment, and further market routs will only leave consumers more pessimistic. Will the dollar’s woes ever end? Within the next few days: probably not. Indeed, the currency faces major event risk this coming week from the FOMC rate decision, the release of Q3 GDP, and non-farm payrolls. The central bank decision and GDP reading hit the wires on the same day, and the former will garner much of the attention. Fed fund futures now price in a 92 percent chance of a 25bp cut on October 31st to 4.50 percent, but there is speculation that Bernanke & Co. could surprise the markets. Will they slash the benchmark rate by 50bp like they did in September as economic conditions worsen, or will they show the DJIA and the S&P tough love by leaving policy unchanged? And what about oil? Given current geopolitical tensions and undeniably strong demand for the commodity, there is much talk about oil jumping to the psychologically important $100/bbl level. Volatility is soaring, and while the greenback is likely to remain weak and oil strong in coming days, all of this wild price action creates the potential for steep corrections market wide.

Euro: Can It Sustain These Record Highs If The ECB Doesn’t Hike?
The Euro hit yet another record high of 1.4392 against the greenback today, and it may simply be a matter of time before the currency jumps above the 1.4400 barrier. The currency’s gains came despite the weaker-than-expected GfK consumer sentiment survey, which dropped to a seven month low of 4.9. After the IFO business confidence report for the same period fell to a 20-month low, the decline in consumer confidence is not very surprising, especially as energy and food prices have soared and left Europeans with less retained income for discretionary spending. In fact, the willingness to spend component of the report dropped to -12.9, its lowest reading since December of 2005, which could very well mark a turn in the consumer sector's contribution to growth. There is little doubt that the European Central Bank will take note of the downside risks to growth that diminishing consumer and investor optimism present. As a result, the ECB is unlikely to raise interest rates before year end – barring a major increase in inflation figures – which provides far less fundamental support for the Euro at current levels.

Commodity Dollars Still Hot On Rallies In Gold, Oil
The Australian dollar, New Zealand dollar, and Canadian dollar all gained on Friday as spot gold prices pushed to multi-year highs while oil held near record levels. The sole piece of economic data came from Canada, as the business conditions survey showed that sentiment regarding orders in Q4 fell negative, suggesting that manufacturers are getting nervous that the Canadian dollar’s move to parity with the US dollar in September will be to the detriment of exports. Since then things have only gotten worse as USDCAD has pushed down to fresh 33-year lows of 0.9589. However, domestic demand in the country remains solid, and with labor markets tightening more and more every month, consumers may be able to pick up some of the slack in economy. In New Zealand, on the other hand, consumption is anticipated to have eased back in September. On Sunday, the New Zealand trade deficit is expected to narrow on the back of softer imports and a gain in exports, as the RBNZ’s aggressive tightening cycle cuts into household spending while the relative easing in the Kiwi reinvigorates demand for the country’s goods.

Bank of England’s Dour Outlook Weighs on the British Pound
On Thursday, the Bank of England issued a gloomy outlook for the UK’s financial markets, noting that the credit, equity, and commercial property markets remain “vulnerable to further adjustments.” The BOE pointed the finger at a sharp slowdown in the US economy and rising credit defaults that “could trigger a further round of asset price falls.” While this analysis does not necessarily suggest that the central bank will be aiming to cut rates in the near-term, it does effectively eliminate much of the probabilities of a rate hike. Indeed, BOE Governor Mervyn King is a staunch hawk and extremely hesitant to enact policies that create the potential for moral hazard to come into play – though one could argue that the BOE’s bailout and guarantee of funds at Northern Rock just a few weeks ago was the epitome of just this. Nevertheless, until UK data starts to reflect a more pronounced economic slowdown and easing in price pressures, interest rates in the UK will likely hold at 5.75 percent until at least Q1 2008.

Kathy Lien is the Chief Currency Strategist at FXCM.