European currencies including the euro, British pound, and Swiss franc were hit hard on Thursday as three of the biggest central banks in the continent – the European Central Bank, the Bank of England, and Swiss National Bank – all slashed interest rates. Here’s a brief overview of what we saw:

European Central Bank - At 7:45 ET on Thursday, the European Central Bank (ECB) cut rates in line with expectations by 50 basis points to a nearly 2-year low of 3.25 percent. As usual, comments by ECB President Jean-Claude Trichet during his 8:30 ET press conference provided greater insight into the current bias of the central bank. One thing was obvious: the ECB is now very dovish. Mr. Trichet said that the outlook for price stability has improved, though he could not rule out a sharp decline next year, suggesting that even they - previously one of the most hawkish central banks in the developed world - are concerned about the potential for deflation. Mr. Trichet also said that he would not exclude cutting rates again, and this seems quite plausible, as growth and inflation pressures are bound to decrease further. As of Thursday’s close, Credit Suisse overnight index swaps were pricing in 142 basis points worth of cuts during the next 12 months.

Bank of England - At 7:00 ET on Thursday, the Bank of England (BOE) unexpectedly slashed rates by 150 basis points to bring the UK Bank Rate down to 3.00 percent, the lowest level since 1955. Indeed, a Bloomberg News poll of economists had only forecasted a 50 basis point reduction, making this move all the more shocking. Looking at the BOE Monetary Policy Committee’s (MPC) commentary released post-announcement, it is clear that the MPC is extremely concerned about not only the instability in the financial markets and persistently tight credit conditions, but also the significant downside risks to growth and perhaps most importantly, the risk that inflation will fall below their 2.0 percent target. The latest CPI figures show inflation growth at 5.2 percent in October, but given the economic slowdown and drop in commodity prices, the BOE has suggested that CPI will plummet in coming months. This echoes the rhetoric of the BOE’s most ardent dove, MPC member David Blanchflower, who said last week that deflation was a bigger concern than inflation, and that rates must be lowered “significantly” and “quickly.” As of Thursday’s close, Credit Suisse overnight index swaps were pricing in 231.5 basis points worth of cuts during the next 12 months.

Swiss National Bank - Just one minute after the BOE cut rates on Thursday, the Swiss National Bank (SNB) surprisingly came in with a 50 basis point reduction to their 3-month LIBOR target rate, bringing it down to a nearly 2-year low of 2.00 percent. Since the SNB had not been scheduled to meet again until December, their rate cut indicates that this was part of a coordinated effort with the other European central banks. In a press release following the rate decision, the SNB said that they adjusted monetary policy in light of the worse-than-expected deterioration of the global economic outlook and lower inflation forecasts, given the drop in oil and appreciation of the Swiss franc. Their discussion of the currency, which they will “keep a close watch on”, suggests that they are somewhat concerned about its ascent and if these moves continue, may signal potential for a coordinated currency intervention on low-yielding currencies in coming months. Credit Suisse overnight index swaps are not updated frequently for the SNB, but I anticipate that they will follow the lead of the ECB going forward.

US Dollar Could Gain Further On Disappointing US Non-Farm Payrolls (NFPs) - Why?

The US dollar gained on Thursday as risk aversion triggered flight-to-quality and sharp declines in US stocks for the second day in a row. While the greenback still remains 300-350 points below its October highs versus the euro and British pound, it seems increasingly likely that we could see another test of those levels once again as event risk remains high. Indeed, Thursday’s release of US continuing jobless claims for the week ended October 25 rose to 3843K, the highest reading since 1983, which suggests that Friday's employment data could be very disappointing. In fact, non-farm payrolls - one of the most watch US economic indicators - are already forecasted to plunge by a whopping 200K. Another important thing to watch, though, will be the unemployment rate, which is anticipated to rise to match the June 2003 high of 6.3 percent from 6.1 percent. However, if the rate climbs even higher, it will actually end up being the highest since the early 1990's. In order to gauge the impact of these releases on the US dollar, it will be important to watch how risky assets respond to the 8:30 ET announcement. The easiest way to do this, perhaps, would be to look at US stock market futures, as signals of a sharp decline when the DJIA and S&P 500 open at 9:30 ET would suggest that the US dollar could strengthen quite a bit on safe-haven flows. On the other hand, if the numbers aren’t quite as dismal as forecasted, the US dollar may ultimately slip lower or simply consolidate through the trading day.

Canadian Dollar Awaits Friday’s Employment Data, Could Extend Commodity Dollar Declines

Carry trades took a hit on Thursday as US stock markets tumbled throughout the day, with the DJIA down 4.85 percent by the NY close, indicating that risk aversion remains alive and well. The Australian dollar and Canadian dollar fell the most versus both the greenback and the Japanese yen, as high-yielding currencies fall out of favor while demand for low-yielders remains high. The commodity dollars could see additional volatility on Friday stemming from the 7:00 ET release of Canadian employment data. The net employment change for October is forecasted to fall by 10K, following a record increase in September. Since this figure rarely meets expectations dead-on, it tends to be incredibly market-moving for the Canadian dollar in the short-term, and thus can provide great trading opportunities. Meanwhile, focusing on the Japanese yen in the long term, I think there’s still quite a bit of bullish potential. Keeping the inverse correlation between the US stock markets and Japanese yen in mind, we need to consider that while many governments have taken active steps to try to stabilize the financial markets, a global economic slowdown is bound to have a negative impact on corporate earnings going forward. As these figures are released, equity markets could fall even lower and take forex carry trades down with them. While I wouldn’t be surprised to see a bounce in these carry trades in coming weeks, the trend remains bearish and should ultimately continue to benefit the low-yielding Japanese yen.

Terri Belkas is a Currency Strategist at FXCM.