The US dollar made a new record low against the Euro and a touch of 1.40 is now inevitable. There were no new drivers behind the latest move as the themes that have been resident in the markets over the past week continue to push the dollar lower. Last Friday’s horrid non-farm payrolls number marked a turning point for not only the financial markets but also for the Federal Reserve. Previously the Fed was reluctant to lower interest rates because they did not want to give the markets the perception that they will bail out traders every time their excessive risk appetite gets them into trouble. (Greenspan did this often, coining the term Greenspan Put.) Now however, the weak labor market not only gives them a big excuse to lower rates, but they have no choice but to do so. In Europe on the other hand, economic data continues to surprise to the upside, validating the ECB’s decision to leave the door open for another rate hike. This dynamic has and will continue to be the primary reason why the dollar is weakening. No FOMC meeting in the past year has generated as much debate and uncertainty as the one on September 18. Traders are still divided on whether the Fed will lower interest rates at all, but the debate among economists is not whether the Fed will lower rates but instead, by how much. According to the 117 economists surveyed by Bloomberg, 69 percent expect a quarter point cut and according to a DailyFX Poll of 255 voters, only 48 percent expect the Fed to move.

Oil prices also hit a new record high above $80 a barrel. If the US economy was not in so much trouble, this move in oil would have certainly stoked concern about inflation and speculation of higher interest rates across the globe. This time around however, the rise in oil will probably have no impact on the Fed’s monetary policy decision. There is no major US data due for release tomorrow, but on Friday we have retail sales, import and export prices, the current account, industrial production, business inventories and the preliminary University of Michigan consumer confidence numbers. Although some traders expect retail sales to confirm the weakness in the labor market, spending may not weaken dramatically until September and October. Even so, there is no doubt that the US economy is weakening and more troubles are yet to come. Industry experts expect the mortgage sector to shed another 100,000 jobs over the next few months. Countrywide Financial has already announced 10k to 12k layoffs. When the Fed moves to cut interest rates, it will not be just a one off cut.
Instead, expect it to be the beginning of at least 75bp of easing.

RBNZ Leaves Rates Unchanged, CAD Continues Towards 30-Year Highs
The Reserve Bank of New Zealand left interest rates unchanged at 8.25 percent today. This decision, as well as the cautionary comments, was widely expected by the market. Central Bank Governor Bollard said that the high level of interest rates is hurting consumer spending and he expects US growth to slow, but at the same time, rising commodity prices and a weaker currency are boosting the economy. The New Zealand dollar has performed extremely well over the past 3 trading days and tonight’s retail sales number will be the last piece of data in an otherwise busy weak for New Zealand dollar traders. Consumer spending is expected to rebound in the month of July after dropping 0.4 percent the prior month. The Canadian dollar has also been in play today. The loonie rallied within 10 pips of its 30 year high against the US dollar. With no economic data released today, the currency pair has been driven higher by the strong move in oil prices.

Euro to 1.40; Will the SNB Raise Interest Rates?
The Euro has broken 1.39 and will be on its way to test 1.40. Economic data continues to surprise to the upside with Eurozone industrial production increasing a whopping 0.6 percent in the month of July. Labor costs also increased from an upwardly revised 2.3 percent to 2.5 percent in the second quarter. It seems that the strength of the Euro has had a much more muted affect on exporters than in the past. Perhaps they learned from their mistakes and have hedged far more aggressively than they did in 2005. The German Chambers of Industry and Commerce said that the US subprime crisis has had little impact on the economy and the strength of the Euro is not a problem for German exporters. The French on the other hand are complaining that the Euro is weighing on growth. Meanwhile, the Swiss National Bank will be announcing their monetary policy decision tomorrow morning. The market is actually expecting an interest rate hike from the SNB. We think there is a strong chance that the SNB will hold given the recent risks in the global markets.

British Pound: Slide Represents Concern About High LIBOR Rates
The British pound was the only major currency to weaken against the US dollar today. Economic data was mixed, with average earnings increasing more than expected while the drop in claimant was smaller than the market’s forecast. This may be due to the potential consequences of the rise in sterling LIBOR rates, which are at a 9-year high. The UK has its own bubble troubles and a higher LIBOR rate only means higher borrowing costs and mortgage payments. UK consumers are up to their neck in as much debt as US consumers. Today’s price action reflects concerns that the bubble may burst.

Prime Minister Abe’s Resignation Matters Little to the Japanese Yen
The surprise resignation by Prime Minister Abe has mattered little to Japanese Yen traders today since the Yen is weaker against some currencies and stronger against others. Typically, political uncertainty is never good for a country’s currency but Abe’s weak approval ratings indicate that Japanese citizens want to see change. Whoever takes Abe’s place will most likely favor low interest rates. Economic growth has been tepid, which is part of the reason why consumers are so unhappy, and unless the new Prime Minister wants to have low approval ratings like Abe, generating faster growth will be one of his top priorities.

Kathy Lien is the Chief Currency Strategist at FXCM.