The Dollar’s Decline Continues To Break Records, Next Fed Cut Looking Deeper and Deeper
The dollar can’t seem to catch a break. The beleaguered currency marked yet another momentous drop against most of its liquid counterparts, chalking up its biggest three day selloff in four years. And, leading that charge was the EUR/USD, which marked a fresh record high for the third consecutive session. Feeding the insatiable desire to sell dollars was yet another round of scheduled and unscheduled disappointing fundamentals. Federal Reserve Chairman Ben Bernanke’s testimony before the House today more or less covered the same dour highlights from yesterday’s delivery to the Senate. The few notable differences between the two speeches came from the Q&A. In response to one particular question, the central banker suggested that it would be “fair” to suggest it is tougher for the Fed to respond now than it was during the last recession back in 2001. This may have been taken to mean by some that the economy is heading for another recession; but what Bernanke was actually referring to was the unwanted mix of quickly receding economic growth and the elevated level of front-line inflation. Addressing the dollar specifically, the Fed Chairman further said the policy group was monitoring its record breaking decline, yet he suggested he still believed foreign investors still had confidence in the world’s largest economy. While Bernanke continued to talk up the struggling greenback, the market was also absorbing disappointing readings from the fourth quarter GDP revisions and a round of second tier employment numbers. Annualized growth shirked forecasts for annualized expansion to accelerate slightly by holding at its five-year low 0.6 percent clip. Noteworthy shifts from the sector breakdown were downward revisions to personal consumption, business investment, commercial construction and government spending. In fact, the only positive change came from exports whose 0.9 percent contribution to GDP is barely keeping the US economy above water. Elsewhere on the docket, initial jobless claims in the week through February 23rd jumped well beyond the consensus to 373,000 – just off of the two year highs from last month. Pricing in this dour data, Fed Fund futures have moved from fully pricing in a 50 bp rate cut on March 18th to a 36 percent chance of 75 bps.

Euro Further Boosted by Strong Employment and Retail Numbers
The euro’s strength is clear; and even in the absence of fundamentals, the currency would likely still be enjoying a strong rally based purely on late-to-the game traders looking to take part in this historical drive. However, fundamental traders would still have their fill in Thursday’s session. There were only a few economic indicators scheduled for release, but each was notable and each would cross the wires far better than economists had hoped. Set with top market moving potential, the German unemployment change extended its amazing run with a 25th consecutive contraction in joblessness. And, this wasn’t a small dip either. A 75,000-person drop in unemployment was far above what the already generous consensus was calling for and follows a 91,000 contraction in January. In turn, the steady improvement in the labor market pushed the jobless rate to a new 15-year low. Changing gears from employment to spending, the leading Bloomberg Retail PMI numbers offered a promising report with the first reported increase in sales in five months. These are promising economic indicators for the ECB’s monetary policy meeting one week from today. Before traders were enthralled with the euro’s rally against the dollar, there was concern over Trichet’s comments that the economy would grow slower than the policy maker had initially expected. Tomorrow, the market will get receive a simultaneous reading on inflation and consumer spending. Though the German January CPI figures are final readings, they could leverage the reaction a surprise German retail report could generate.

Australian Dollar Rallies for Sixth Day into Record Territory
Like the euro, the high yielding Australian dollar enjoyed yet another strong advance against its struggling US counterpart that brought AUD/USD to a new 23-year high just below 0.95. While this impressive advance is still largely based on the diverging expectations for Australian interest rates – in contrast to US interest rates – there was some new data to contribute to bull’s push. Business investment through the fourth quarter rebounded 5.1 percent after marking its sharpest contraction in 8 years. The New Zealand trade account on the other hand, quickly erased its first surplus in seven months with a NZ$320 million shortfall in January.

British Pound Can’t Find Its Dollar Footing as Confidence Drops to 13-Year Lows
The British pound remains one of the few currencies that hasn’t taken full advantage of the US dollar’s plunge. Following up on yesterday’s disappointing revision in fourth quarter private consumption, the GfK Consumer Confidence survey for February crossed the wires with a sharper-than-expected drop. This indicator was initially scheduled for release on Friday, which added to the surprise of a -17 reading that was the most pessimistic the report has read in 13 years. Sinking confidence in Brit’s outlook for growth and their own financial position isn’t surprising considering the worsening housing slump and steadily rising prices that have eaten into discretionary spending.

Carry Trade Sells Off as Risk Rises, Japanese Data Helps the Trend Along
The carry trade was on chopping block again today. News that Freddie Mac – the US government-sponsored mortgage financial company – recorded a $3.56 billion loss in the fourth quarter further stirred up doubt in the health of the credit market. Aside from the risk association, data played its part for the carry currencies. Japanese retail trade rose through January – though primarily due to rising prices. The franc found fuel in 2.7 percent rise in fourth quarter hiring which brought overall employment to its highest level or records going back to 1991.

Kathy Lien is the Chief Currency Strategist at FXCM.