More Market Turmoil, Fed To The Rescue
It was another rocky session for the equity markets, which meant further volatility for the US dollar in the foreign exchange realm. Falling against the Euro, the greenback made headway against the British pound, Japanese yen and Canadian dollar, after it was all said and done. For the record, the Dow Industrials dropped through the 13,100 figure only to rebound as high as 13,306 at midday inNew York and looking to close just down 31 points ahead of the weekend. Notably on the day, and helping to stem further losses in the session, the Federal Reserve provided $38 billion in reserves to curb current credit crunch concerns that seem bent on not disappearing any time soon. The move was in coordination with the Bank of Japan and Reserve Bank of Australia, both of which lent their own markets some liquidity as it has become more than apparent that the subprime losses from a couple of days ago have turned into a contagion effect. Now, given the current negativity in the markets, dollar weakness is likely to persist even as traders have pared back expectations of a rate cut in the near term. Previously pricing in a 100 percent chance of a 25 basis point rate cut in next month’s decision, sentiment is still overweight on the possibility, pricing in an 80 percent shot of an interest rate reduction in the last 48 hours. Incidentally, next week’s economic calendar will all but confirm the notion of further weakness in the US currency. Although retail sales figures are expected to remain positive for the month, consumer price inflation, trade balance and net foreign securities data are all expected to show declines. Without much to go on in the coming week, it may ultimately be a rough one for dollar proponents with expectations of further losses to be announced in the next five sessions.

Amongst Credit Crisis, Japanese Yen Continues To Gain
With risk being controlled through liquidation of carry trades, the Japanese yen has appreciated against the majors notably higher yielders in the last 36-48 hours. The appreciation has been so rapid that the Bank of Japan, in tandem with efforts by central banks around the world added 1 trillion yen, or $8.5 billion, to the financial system in efforts to stem a formidably hard landing. Although the gesture is more than is needed, it may all be set aside as further gains are expected for the underlying currency, especially given continued speculation on interest rate changes by the country’s central bank. As a result of the developments over the past couple of days, sentiment has shifted extraordinarily as the market now anticipates at least one rate hike before September. Economic fundamentals in the overnight continue to purport such a move by policy makers with both consumer confidence and industrial production figures supported in their monthly assessment. As a result, markets may received a breather in yen buying should next week’s GDP figure come in less than expected. Already consensus estimates are to the downside, pitting a second quarter preliminary assessment of 0.9 percent growth. The figure pales in comparison to 3.3 percent growth forecasted previously.

Euro Remains Supported Throughout Session Despite Lackluster Data
Setting aside the credit crunch and recent attempts to stem concerns through liquidity offerings, the Euro remained relatively supported against the US dollar in the New York session. Surprisingly, gains were seen in the single currency despite lackluster data in the Eurozone. Manufacturing and industrial production were negative for the French economy as Italian growth was below estimates. Expecting to grow by 2.1 percent in the quarterly evaluation, expansion was limited to 1.8 percent in the second quarter for the economy. Both figures should feed sentiment heading into next week’s consumer price report, which is expected to show continually mild results. Estimates are showing forecasts of a dip in consumer prices for the month of July. However, the decline shouldn’t deter the central bank from raising rates as policy makers remain bent on future price elevation.

Pound Bidders Look To Next Week In Hopes For Sterling
With no economic data for pound enthusiasts scheduled for the session, it seemed that sterling cross declines fed into the major, helping it to decline through and remain below the 2.0300 figure throughout the 24 hour session. As a result, proponents for the major currency are looking to next week’s docket of data in offering some respite from this week’s blood bath. Mainly, in question will be both the consumer price and retail sales figures. Although the market has confirmed a rate hike of 25 basis points in the near term for the UK interest rate, this week’s set of data may jeopardize market estimates of a rate past six percent in the next 6-8 months. Incidentally, both reports are expected to show declines for the month, which may show that interest rate hikes are finally working their way through the market. As a result, mounting focus will also be placed on the midweek release of the Bank of England minutes. Should dissenters be heard, pound sterling is likely to have a rough one before the end is over.

Commodity Currencies Continue To Be Pressured
Aside from the Canadian dollar, both the New Zealand and Australian dollars continued to remain under pressure throughout the session. The AUDUSD fell below the 0.8600 support as the NZDUSD currency pair slipped below the 0.7600 support figure. Further carry trade reduction bolstered declines in both major pairs, setting aside any economic data that was posted in the overnight. However, helping the Canadian dollar remain afloat was a report on employment in the New York morning. Although the net change in employment was far less than expected at 11.3K, the employment rate dropped to lowest in 33 years. Incidentally, the survey results give some indications that the labor market continues to remain tight, bolstering speculation of a rate hike in the commodity economy.

Kathy Lien is the Chief Currency Strategist at FXCM.