Dollar Loses Big on Carry Trade Surge, Fed’s Bernanke Sinks Buck Further
The US dollar was among the performers among major currencies on the day, as a sharp improvement in risk sentiment allowed traders to re-enter dollar-short positions. A morning announcement by the US Federal Reserve and other major central banks forced large corrections across risk-sensitive asset classes, as the monetary policy authorities outlined plans to ease current credit market crises. The US Fed, European Central Bank, Bank of England, Bank of Canada, and Swiss National Bank all released plans to provide extra liquidity to money markets—auctioning off loans with comparatively low interest rates to ease tension in global money markets. The landmark cooperation between global central banks clearly sat well with the majority of traders, and the instantaneous tumble in money market rates allowed speculators to breathe a sigh of relief given overall financial duress. The greenback initially saw a bid on surging US Treasury Bond yields, but speculators clearly reversed their initial dollar-bullish reaction as they poured money into higher-yielding currencies. Though a later reversal in the Dow allowed the dollar to regain ground against high-yielders, it remained relatively clear that momentum remained to the downside for the downtrodden greenback. Indeed, a positive finish for the Dow sealed the dollar’s fate, and a surge in Asian equity index futures suggests that greenback momentum will be tied to the downside through later Tokyo trade. Yet traders may be reluctant to force major USD moves ahead of tomorrow’s Advance Retail Sales and Producer Price Index reports. Surprises in either data release could easily force sharp movements for all dollar-denominated pairs.

Euro Benefits from Dow Rally, SNB Decision May Drive Sharp Moves in Euro and Swiss Franc
The euro spent the day trading off of shifts in global risk sentiment, finishing sharply higher against the Japanese Yen and Swiss Franc on a surge in the carry trade. Yet the single currency remained unable to clear the key $1.4750 against the US dollar, and continued failure at the psychologically significant level could potentially leave the euro offered through short-term trade. Our Technical Analyst Jamie Saettele believes that a bearish bias is warranted as long as price remains below this key resistance point. (EURUSD Technical Outlook) A limited morning of European event risk did little to shift fundamental outlook for the euro, and a relatively empty economic calendar suggests that the currency may continue to move off of shifts in global risk sentiment. It may likewise be important to watch for reactions to upcoming French inflation and employment numbers due at 06:45 GMT. Though consensus forecasts call for little change in CPI for the month of November, any sharp surprises could drive short-term EUR volatility. Otherwise, traders will monitor any new developments from a Swiss National Bank rate decision at 08:30 GMT. The bank is very widely forecast to leave rates unchanged through its quarterly decision, but any noteworthy shifts in rhetoric could easily drive Swiss Franc and euro price movements.

British Pound: Employment Data Not Encouraging Enough
Like most of the majors, GBPUSD responded to the global effort by central banks to inject short-term liquidity into the markets. The pound rallied from peak to trough nearly 200 points after the plan was unveiled. For the Bank of England’s part, officials said they were increasing the size of reserves to be auctioned and broadening the range of collateral they were willing to accept for three-month loans. This is a promising first step for the UK economy as lending and housing sentiment continue to suffer from sticky credit markets; though it will likely be some time before the worldwide problem is resolved. From the economic docket, labor data was setting new records. A pleased Prime Minister Gordon Brown presented parliament with an 11,100 drop in jobless claims through November, bringing the overall number of Brits collecting unemployment benefits to its lowest level since 1975. At the same time, the jobless rate matched a 32-year low. Though, despite these numbers, pound traders were little impressed, suggesting bulls have grown accustomed to a strong labor market.

All Comm Bloc Sees Data, Ranges Still Intact
The Australian, Canadian and New Zealand dockets were all looking at event risk for Wednesday’s session. Starting early in the Asian session, Westpac released its December reading on consumer confidence. According to their survey results, optimism rose for the first time in three months as Aussies showed their satisfaction in the outcome of the nation’s general election where Labor, headed by Prime Minister Kevin Rudd, took the reigns. When the New York session rolled around, the Canadian International Merchandise Trade release was competing with the surprise push from central banks to restore liquidity to short-term credit markets – including participation from the BoC. Regardless, the October physical trade balance marked an unexpected rebound from its smallest surplus in eight years to C$3.3 billion as a record high loonie actually cooled import prices faster than it depressed exports. Finally, RBNZ Governor Bollard may be seeing his efforts to cool spending and inflation working as retail sales dropped the most in four months.

Japanese Yen Falls As Risk Rebounds, Gets Off Before Pull Back
Once again, the risk attributes of the Japanese yen were binding the currency to a sharp rally in equities and general risk acceptance after the Federal Reserve announced it, along with a number of other central banks, were putting into effect a new plan to correct the persistent credit crunch. A more than 100 point USDJPY rally was triggered before US exchanges opened for trade as the pair tracked Dow equity futures higher. However, this correlation broke down when the Dow marked a sharp pull back when the New York evening session. From the economic docket, inflation data was in focus with the upstream DCGPI figure for November on tap. Though, a more modest than expected pull back in inflation pressures hardly raised the chances for a rate hike any time soon. Looking ahead, yen traders will likely keep an eye on the SNB decision as a general guide to the health of the carry trade.

Kathy Lien is the Chief Currency Strategist at FXCM.