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The major currencies whipsawed around in the Tuesday session, with the dollar sharply recovering from all-time lows against the euro to bounce back toward the 1.59-level. Heightened risk aversion benefited the yen pairs as the Japanese currency rallied considerably against the euro and sterling amid growing fears of accelerated deterioration in the US economic outlook.

In contrast to the Fed's June monetary policy statement, which downplayed the threat of further sharp economic deterioration, Chairman Bernanke said there are "significant downside risks to the outlook for growth", raising fears that the worst for the economy may not have passed. However, he also added that upside risks to the inflation outlook have also intensified. His comments tempered expectations for rate hikes in the near term, as Fed funds futures shifted to pricing an 82% probability for a December rate hike.

US economic reports released today included NY Fed manufacturing, PPI, retail sales and business inventories. The NY Fed manufacturing survey improved to -4.92 in July, better than the expected -8.0 from -8.68 a month earlier. The June PPI readings reflected lingering inflationary pressure in the economy, with the headline monthly figure jumping to 1.8% from 1.4%, while core prices held steady at 0.2%. Retail sales were softer than forecast, pointing towards continued consumer retrenchment amid deteriorating sentiment. The headline June retail sales report fell to 0.1%, dropping from 1.0% in May, while the excluding automobiles retail sales figure declined to 0.8%, falling short of calls for a drop to 1.0% from 1.2% in the previous month.

The greenback and the major equity bourses took refuge in a sharp pullback in the price of oil, which closed lower by over $6 to $138.69 per barrel. The Dow Jones erased triple digit declines to recover into positive territory by the afternoon.

Euro Shrugs off Data

The euro shrugged off disappointing economic data from Germany, with the ZEW survey falling to a record low, rallying to a fresh all-time high against the dollar above the 1.60-level to 1.6038. However, those gains were short-lived as the greenback recovered sharply by the New York session, pushing the single currency back toward the 1.59-level.

Germany¡¯s July ZEW economic sentiment survey deteriorated by more than expected, posting a -63.9 reading -- its lowest on record, versus calls for a smaller decline to -55.0 from -52.4. The current conditions component plunged to 17.0, compared with forecasts for a smaller drop to 32.7 from 37.6 from June.

While the recent weak economic data from the Eurozone has tempered expectations for further tightening from the ECB, jawboning from council members have reiterated lingering risks to inflation, suggesting there may be one more rate hike in the offing.

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