US Dollar Joins Low-Yielding Japanese Yen, Swiss Franc in Declines as Demand for Carry Improves

The low-yielding US dollar, Swiss franc, and Japanese yen were the weakest of the major currencies on Monday, though the latter was the most sluggish of the bunch, as a solid pickup in risk appetite led higher-yielding currencies and stocks higher. Indeed, the G-20 communiqué helped to inspire confidence that the member countries will make headway in stemming the financial crisis as they outlined plans by which to strengthen the financial system and restore global growth. Meanwhile, US Treasury Secretary Geithner said that he will soon announce more specific details of his plan to help banks clean up the toxic assets that are leaving uncertainties in the financial markets to linger, while Federal Reserve Chairman Bernanke said in an interview with '60 Minutes' that the US recession would likely end this year and that the risk of a depression has been averted.

However, US economic data was broadly disappointing as industrial production fell for the fourth straight month in February at a rate of -1.4 percent . Furthermore, the release of TIC data unexpectedly showed that foreign investors were net sellers of US assets, as net long-term flows fell by $42.986 billion in January, the sharpest decline since August 2007 when flows plunge a record $72.882 billion.

Looking ahead to Tuesday, signs of easing price pressures may continue to as the US Producer Price Index is forecasted to have risen a slight 0.4 percent in February, while the annual rate may tumble to a more than 6-year low of -1.4 percent. Meanwhile, the measure that excludes volatile food and energy costs could slow to an annual pace of 3.8 percent from 4.2 percent. Overall, the news would suggest that input costs are falling dramatically with declining commodity prices, which should translate into lower consumer prices. However, the release doesn't tend to have a huge impact on US dollar price action.

Euro Gains Despite Accelerating Job Losses as CPI Rises for First Time in 6 Months

The euro surged during the European trading session to test 1.3050, but subsequently backed off to end the day just below 1.3000. Euro-related data was far from optimistic, but price action continues to simply reflect shifts in risk appetite. Indeed, job losses in the Euro-zone accelerated during Q4 as the quarterly rate of employment fell 0.3 percent compared to a decline of 0.1 percent in Q3. As a result, the annual rate was dragged down to 0.0 percent from 0.6 percent. Meanwhile, data showed that Euro-zone CPI rose in February for the first time since September at a rate of 0.4 percent, which pushed the annual rate up to 1.2 percent from 1.1 percent. Likewise, the core measure of CPI, which excludes volatile energy, food, alcohol and tobacco prices, accelerated to an annualized pace of 1.7 percent from 1.6 percent. All told, both of these inflation measures remain well below the European Central Bank’s 2 percent target and as they’ve said in the past, short-term fluctuations will not have much impact on their plans for monetary policy going forward. Nevertheless, the odds remain in favor of one more rate cut by the ECB on April 2 as Credit Suisse overnight index swaps are still pricing in an 80 percent chance of a 25 basis point cut 1.25 percent.

Looking ahead to Tuesday, the release of the German ZEW survey of investor sentiment for the month of March is anticipated to reflect increasing pessimism on both current conditions and the economic outlook. Indeed, the index of sentiment on the current situation is forecasted to fall to a more than 5-year low of -90.0 from -86.2 while the outlook is projected to slip down to -8.0 from -5.8. This report can be market-moving for the euro on a very short-term basis upon release at 6:00 ET, with disappointing results likely to weigh on the currency. On the other hand, better-than-expected data could provide a bit of a boost for the euro.

British Pound Trades in 300 Point Range as FX Volatility Remains High

The British pound experienced a volatile day of trading versus the US dollar, as the pair rallied for a test of 1.4200 before falling and stabilizing above Fibonacci support at 1.4065. In fact, GBP/USD implied volatility taken from 1-month OTC options remains historically high at 18.1425 percent. The fundamental view of the UK remains bleak, but with the major currencies divided into two camps - risky and safe - shifts in investor sentiment remain the primary driver of price action. For what it’s worth, the British pound falls into the “risky” category despite the fact the Bank of England has cut their Bank Rate to 0.50 percent, and as a result, we anticipate that risk trends will continue to determine where the currency goes going forward.

Terri Belkas is a Currency Strategist at FXCM.