Federal Reserve officials are out in force trying to pacify the market after the euro hit a new record high on the back of yesterday’s sharp dollar weakness.

As the EUR/USD hits new all-time highs, the question facing the currency market in Q3 of 2007 is how high can it go?

The Japanese yen made substantial gains today as a bout of risk aversion permeated throughout the forex, bond, and equity markets.

Demand for carry trades continue to be strong with the Japanese yen falling to a new record low against the euro and decade or multi-decade lows against other currencies.

Concerns about US economic growth have now been pacified by the strong level of hiring in May and June.

For the past few months, the stability of the labor market has pacified concern about the housing market because as long as people have jobs, they will continue to pay their mortgages. However the problems in the housing market are worsening with sharp drops seen in existing, new and pending home sales for the month of May.

The amount of jobs created last month will be critical in determining where the dollar is headed next.

Unsurprisingly, the markets have been extremely quiet with US traders off celebrating Independence Day. There has been little action in the foreign exchange market with the dollar strengthening only slightly against the British pound and Japanese yen, and weakening slightly against the euro and commodity currencies.

The US dollar has recovered from Monday’s sharp losses thanks to profit taking and position squaring ahead of the Independence Day holiday.

Traders were out to sell the US dollar today and nothing could stand in their way. Stronger than expected manufacturing sector growth only helped the dollar rally a mere 15 pips against the Japanese yen, and even those gains were lost shortly afterwards. The move in the US dollar indicates that the foreign exchange market is focusing almost exclusively on bond yields today.