A Run on the Dollar?
It was another terrible week for dollar bulls culminating in an announcement on Friday that Bear Stearns, the fifth largest US securities firm was on the verge of running out of cash and in need of a bailout by the Fed. The shock of the news sent the dollar below 100 to the yen and the Swissie and further record lows against the euro.

The US economy continues to play out a nightmarish scenario of financial collapse and the dollar is now in danger of tipping into an all out panic liquidation with economic news mattering less and less as sentiment drives volatility through the roof. Perhaps, if the Bear can survive the week finding a white knight to rescue it, US capital markets will calm down. However, if the firm implodes the shock to the US financial system is likely to be so severe that a full run on the dollar may ensue

Next week the market will follow the Bear story and will then quickly turn its focus to the FOMC rate decision on Tuesday. Most analysis were looking for a 50bp cut, but with Friday’s news now affecting trade, expectations have ratcheted to 75bp or even an unprecedented 100bp cut. In short, US rates continue to decline and both fundamentals and sentiment show no mercy to dollar longs.

Euro Keeps on Marching
Despite a sell off after the Fed’s infusion of $400 billion in liquidity, the Euro spent the majority of the week setting higher and higher all time record levels. The bullish sentiment was fueled by the continuous stream of dour U.S fundamental data, and the surprising evidence of the Eurozone economy’s resiliency. The region saw unexpected increases in industrial production, exports and business confidence, fueled by strong Asian demand. Furthering the ECB’s hawkish stance was an unexpected increase in CPI, which saw the headline and core reading increase on rising energy, food and labor costs. Then the Bear Sterns bailout on Friday led to the dollar breaking down and sending the Euro above 1.580

The Euro started to end the week declining on profit taking and intervention speculation, despite the typically bullish CPI numbers from Europe and the U.S. As dollar conversion levels continue to set multi period and all time highs against the major currencies, government officials and policy makers have started to voice concerns, and increased the chances of a coordinated central bank intervention. That was until the announcement of JP Morgan and the Fed coming to the rescue of Bear Sterns, whose customers started to make a run on the bank, and all bets were off after that. Investors started to fear the worse, and began wondering if there was a systemic problem in the U.S. banking industry.

The week may start off quiet as all eyes will be on Tuesday’s FOMC rate decision and subsequent commentary from Fed Chairman Bernanke. That is unless the Fed decides to get an early start on cutting rates, as they did this weekend cutting the discount rate a quater point. Many are now speculating that a 100 point cut is a certainty and more action will be needed to avoid a monumental break down of the credit markets. Other than that, the major event risk from the calendar will be on Friday, where PMI manufacturing and services are expected to signal that the European economy is maintaining above the 50 boom/bust level and that its is weathering the affects of a strong Euro and U.S. slowdown. A Fed rate cut and the diminishing prospects of a ECB cut is fundamentally enough to believe that there remains more upside potential for the currency.

1 Yen = 1 US Cent, Will Japan Intervene in Currency Markets?
The Japanese Yen surged to its highest levels in nearly 13 years, as widespread dollar weakness allowed the East Asian currency to breach the psychologically significant ¥100/dollar mark for the first time since 1995. Traders now asks themselves whether the Yen's dramatic appreciation will be enough to elicit a similarly dramatic response from Japanese government officials. Namely, Yen speculators wonder whether the Japanese Ministry of Finance will intervene in order to halt the Yen's advance. The last Ministry of Finance forex intervention occurred just four years ago with the USDJPY near its current levels, and as such, it is reasonable to fear similar action by the Japanese government through the short term. Yet some claim that there are many other mitigating factors to consider when thinking about a potential intervention. The question of whether to intervene remains the most critical factor in USDJPY direction -- trumping all other short-term fundamental and technical analysis.

High-ranking Ministry of Finance officials have stated that the MoF does not stand to intervene at current market levels. Vice-Finance Minister Shinohara said earlier this week that current circumstances are different than those seen through past interventions in 2003 and 2004, but other top government officials have clearly expressed their displeasure with recent Yen strength. Given the Japanese economy's key dependence on export demand, an exceedingly strong exchange rate could quite easily affect domestic economic growth. A global backdrop of deceleration in international consumption may only heighten fears of a Japanese export-led economic slowdown, and it will be very important to watch ongoing developments in both the economy and exchange rates. At the end of the day, it is very difficult to know whether or not the Ministry of Finance will flood the market with Yen and send the USDJPY significantly higher, but USDJPY-bears should clearly remain on alert for any potential action from the ominously powerful MoF.

Pound Fails To Rally On Dollar Weakness, Credit A UK Concern As Well
The UK economic calendar was relatively full over the past week, but scheduled data would ultimately have less influence over the strength of the pound than fears of a financial market crash did. A few bold market headlines shook confidence in the health of global credit markets last week. Towards the beginning of the week, risk appetite was actually whetted by the Federal Reserve’s TSLF program that would injection an additional $200 billion into the economy. The confidence this announcement restored in yield demand drove GPBUSD through 2.02. However, things quickly turned for the worst from there. On Thursday, the media reported that major hedge fund Carlyle Capital would have all its assets seized (and potentially dumped on the market) after failing to meet a margin call. Far more worrisome though was the Fed’s emergency bailout of Bear Stearns. Should a major financial player collapse, lending could come to a halt. There are a few reasons this data would have such a distinct influence over price action. However, London’s title as the world’s financial capital, and expectations for the BoE to further lower its rate over the coming months provided the most amplification.

The economic calendar also had its way with the pound – but primarily in the beginning of the week before risk trends will started to pick up. The week opened with the upstream PPI inflation readings for February. Factory-gate price pressures failed to accelerated, but still matched the 16-year high 5.7 percent clip from January. From the economic side of monetary policy, the data was far more dovish. Factory activity through January unexpectedly cooled 0.1 percent while the leading indicators composite (used to forecast growth three to six months out) contracted for the third consecutive month, which was also the sixth drop in the past seven months. Further dimming an optimistic outlook for growth, the RICS house price balance dropped to -64.7 percent – the worst reading since the UK’s last recession in 1990.

In the week ahead, the economic docket will have to jostle for attention among broader event risk trends. The health of global financial markets will be of primary importance for pound traders. Beyond that, the Fed’s rate decision will have a dramatic influence on GBPUSD, but it will also have its impact on the pound alone as market participants look for guidance as to how the BoE handles monetary policy next month. From the a number of top market movers will lie in wait. Scheduled for release on the same day as the FOMC decision, headline UK inflation for February bolster rate watchers’ outlook for the MPC. The BoE minutes will give some insight into the group’s decision to hold rates at 5.25 percent two weeks ago. Finally, the rest of the week will give a wrap up on the consumer as jobless claims, net borrowing and retail sales will measure Brit’s contribution to growth in these difficult times.

Swiss Franc Hits Parity With Dollar, But Not Because Of The SNB
The Swiss franc was the top mover (behind the Japanese yen) over the past week. Not only did the currency rally to a new high against the US dollar, but it also surpassed parity. Along with EURUSD’s push through 1.50 and USDJPY’s drop below 100, this is yet another historic milestone for the currency market. And, looking over the economic calendar for the past week, there were certainly fundamentals winds blowing over the Swissie; but the true driver for the currency’s record breaking run didn’t come with a scheduled release time. Risk aversion has had its way with the yield-sensitive currency pairs since the credit market began to see real trouble back in September. However, the Fed’s emergency loan to Bear Stearns brought the financial market crisis to a new level. The near collapse of one of the world’s largest investment banks sent a shock through financial markets as it revealed just how bad credit market conditions were. If the foundations of basic lending and borrowing are unstable, the carry trade is certainly not a safe haven for capital.

Though the broader risk trends playing out in the market were the primary driver for the Swiss franc’s price action last week, the economic docket still produced a few notable economic indicators that will have an impact on the fundamental health of the currency. Heading into the period, market participants were predicting the SNB rate decision would be the prime opportunity for volatility. Ultimately, the SNB didn’t break with the market’s forecasts for holding its benchmark lending rate at an average 2.75 percent. On the other hand, they did deliver notable changes to their outlook for inflation and growth. The problems in the global credit market and waning demand from the US have led the policy authority to downgrade their 2008 growth outlook from “about 2.0 percent” to 1.5 to 2.0 percent. At the same time, the 2008 inflation forecast was revised from 1.7 percent to 2.0 percent while the 2009 projection was stepped up from 1.4 to 1.5 percent. While the SNB is not likely to move without the ECB going first, this does sow the seeds for a possible hike down the line.

For the days ahead, though the economic calendar will fill out, risk sentiment will almost certainly play a greater role in defining price action. Another bailout or repercussions from Bear’s emergency lending could quickly revive volatility. Another threat to risk trends will be Tuesday’s FOMC rate decision. The Fed’s rate cuts are no longer merely aimed at helping out the US economy, but also at stabilizing the entire financial system. When there is a lull exogenous action, the economic calendar could fill in the gap with a number of notable market movers. January retail sales will measure consumer’s health while fourth quarter industrial production will gauge business activity through a high currency, rising input costs and fading foreign demand. The balance and upstream inflation reports for February will hit the wires back-to-back, though their impact on price action has historically been restrained.

Canadian Dollar Remains Above Parity – What’s Next?
The Canadian dollar joined all major G10 counterparts in a virtually unrelenting onslaught against the US dollar, with the Loonie charging noticeably above parity against the Greenback for the third consecutive week of trading. Fresh economic developments for the world’s eighth-largest economy included a significantly stronger-than-expected Housing Starts result, while later International Merchandise Trade data likewise bolstered outlook for Canadian expansion. Indeed, the Loonie seems to be riding a wave of bullish economic data; the previous week’s stunning Employment Change report remains fresh in the minds of Canadian dollar bulls. Whether or not the economy’s bullish streak can continue is the key question rolling forward, however, with next week’s key Consumer Price Index report to almost-certainly drive substantial volatility across CAD pairs.

Short term direction in the Canadian dollar may very well depend on the results from Tuesday’s CPI data, with a later International Securities Transactions report to likewise garner currency trader interest. The former will be critical in solidifying interest rate expectations for the domestic economy—a key driver of medium term movements across all major currencies. Markets currently expect that the Bank of Canada will continue on its interest rate-cutting cycle through the medium term, and some analysts call for an aggressive 50 basis points in BoC rate cuts at the next announcement in April. Yet a jump in Core CPI could easily derail plans for substantial monetary policy accommodation; given a fixed inflation target of 2.0 percent, the central bank will certainly react to any troubling trends in domestic price pressures. Any indication that the bank will temporarily halt or slow its current cutting cycle could only boost the Loonie’s prospects against the progressively lower-yielding US dollar. To that effect, it will likewise be critical to watch for any surprises from the coming week’s US Federal Open Market Committee’s interest rate announcement. Given that the US and Canadian Dollars are the second and third-lowest yielding currencies of the G10, respectively, the interest rate differential between the two may be an especially decisive factor in determining short and medium term USDCAD direction.

Aussie Rally Targets 24-Year High As Gold Breaks $1000/oz
The Australian dollar came close to hitting the 24-year highs achieved on February 28 amidst a massive rally in gold to an all-time high of $1,009/oz. However, resistance at the 0.9450 level capped gains while a subsequent pullback in commodities on Friday afternoon weighed the AUD/USD down. Nevertheless, the fundamentals were generally in favor of Aussie strength as the labor market experienced its 16th straight month of job growth in February. Indeed, the net employment change proved to be stronger-than-expected at a whopping 36,700, leading the jobless rate to 4 percent, the lowest reading since 1974. The news only stoked concerns that rising wages and solid domestic spending will add to building price pressures, especially as the Reserve Bank of Australia raised rates to a 12-year high of 7.25 percent two weeks ago in order to combat inflation.

However, with the instability in the financial markets and tight credit conditions remaining a problematic issue globally, the RBA has little room for maneuver with monetary policy going forward. As a result, Australian economic data may not play as critical of a role in Aussie trade, though traders should still pay heed to event risk and commodity prices. This week, event risk will be very thin, with only the Westpac Leading Index and DEWR Skilled Vacancies scheduled to hit the wires. Neither release tends to be very market-moving, so the status of risk aversion and demand for carry trades may be a better gauge of directionality. According to Technical Strategist Jamie Saettele, the AUD/USD pair may be in “wave 5 within the 5 wave bull cycle from .8512 is underway towards a new high (above .9496). Near term, expect price to remain above .9327. If .9327 gives way though, look for support near .9285” (see Jamie’s full Daily Technical Report for more).

Kiwi Benefits From Commodity Binge, But A Turn Lower May Be Near
Similar to the other main commodity currencies, the New Zealand dollar benefited from hot oil and gold prices over the last week, as the NZD/USD pair tested the 26-year highs near 0.8200 once again on Friday. The move came after New Zealand manufacturing sales gained 8.3 percent in Q4 as production of meat and dairy products surged. This was the sharpest increase since record-keeping began 15 years and was led by a 26 percent jump in meat and dairy output. Excluding inflation, sales rose a more tepid 3.4 percent, highlighting just how strong commodity prices have been in recent months. Meanwhile, retail sales rose exactly in line with expectations at a 0.3 percent pace, but with interest rates in New Zealand already at a record high of 8.25 percent, there is very little chance that the Reserve Bank of New Zealand would consider tightening policy further. Indeed, given the global credit crunch and instability in the financial markets, any sort of rate hike could do more harm than good in the New Zealand economy.

As a result, economic data from New Zealand may not play as critical of a role in Kiwi trade, unless the released prove to be bearish for the currency. Nevertheless, traders should still pay heed to event risk and especially commodity prices. This week, event risk will be very thin, with only the Credit Card Spending index scheduled to hit the wires. This figure does not tend to be very market-moving, though it is a good leading indicator for the next round of retail sales data. Meanwhile, the status of risk aversion and demand for carry trades may be a better gauge of directionality for the pair. According to Technical Strategist Jamie Saettele, the NZD/USD pair may be due for a sharp reversal lower given his Elliott Wave analysis.

Boris Schlossberg is a Senior Currency Strategist at FXCM.