The holiday shortened week ended with the U.S. Dollar losing ground to most major currencies as Non-Farm Payrolls fell more than expected and the unemployment rate jumped to a 5-year high.

The larger than expected decline in Non-Farm Payrolls heightened concerns that the U.S. is headed toward a recession. The actual decline of 84,000 jobs was worse than pre-report estimates of 75,000 jobs. Traders are now pushing the date for a rate hike by the Fed well into 2009. The focus is now going to be on U.S. financial instruments to see if traders begin to price in the possibility of a rate reduction.

With the news that the U.S. economy is worsening, Forex traders may be forced to rethink their aggressive long Dollar positions initiated since July. Some traders are beginning to think that the decline in some currency pairs has been overdone to the downside. This may initially force position lightening like Friday's action, but may eventually grow into full blown short-covering rallies.

The EUR USD showed some strength on Friday in the wake of the weaker than expected U.S. Non-Farm Payroll Report and the spike in the Unemployment Rate. With some traders now talking about a possible rate cut by the Fed before the next rate hike, short EUR USD traders may begin to adjust positions. Do not be surprised by the start of a massive short-covering rally based on the negative news today.

Earlier in the week the European Central Bank left rates at 4.35% and ECB Bank President Trichet issued a somewhat dovish comment stating that the Euro Zone countries were in an "episode of weak activity." Trichet's comments should be interpreted as somewhat dovish, however, because they did not include any comments about future interest rate reductions. Reading further into his comments, one can conclude that he is still concerned about inflation when he stated "upside risks to price stability...prevail." His more dovish comment mentioned the downside risk to "growth." If the market begins to believe the ECB will leave rates steady while the Fed ponders a rate cut, the Dollar may come under tremendous pressure again as a lot of shorts may be blown out of their positions.

The USD JPY broke hard into the release of the U.S. Non-Farm payroll number as traders pulled out of the unstable Dollar to seek the safe haven of the Yen. Following the release of the worse than expected employment number, the USD JPY started a strong short-covering rally. This was more of a reaction to the lack of fresh sellers rather than new buying. Traders believe the U.S. is likely to slip into a recession because of expectations of slow global growth but may have already priced the weak employment report into the price of the pair. Another reason for the rally may have been the unexpected decline in Japanese Capital Spending. This bearish report will most likely lead to a decline in GDP and bring the Japanese economy closer to a recession. Finally, unless the U.S. stock market begins to find support and rally, traders are likely to continue to liquidate positions in the higher-yielding U.S. assets to seek the safety of the Yen.

The GBP USD was under pressure all week as expectations are for the U.K. economy to enter a recession soon unless it is already there. A bad housing market and high unemployment continue to encourage selling of the Pound. The Bank of England decided this week to leave rates unchanged at 5%. It cited elevated inflation as the main reason for not cutting rates. It is clear that the BoE feels strongly about allowing the U.K. economy to pull itself out of its decline without any stimulus such as an interest rate cut. Most traders are not buying this chain of thought and are anticipating at least two rate cuts by the BoE before the end of the year. These cuts may total as much as 1.5%. More signs of a weaker U.S. economy or a rate cut by the Fed may slow down the decline in the Pound or trigger a much needed short-covering rally.

The USD CHF pushed higher this week. This buying was obviously not related to the carry-trade as the U.S. stock market fell sharply. Traders must feel that the U.S. economy is going to strengthen before the European economies turn around. The higher Dollar versus the Swiss could top out if the U.S. economy weakens further or if the U.S. credit crisis worsens. If those events take place, then look for traders to seek the safety of the Swiss Franc.

The USD CAD yo-yoed most of the week on conflicting economic data. Early in the week the Bank of Canada surprised long traders by keeping rates unchanged at 3% and hinting at no further rate cuts this year because the Canadian economy was operating near capacity. Lower crude oil and commodity prices pressured the Canadian Dollar most of the week, but on Friday a better than expected Canadian Unemployment report provided strength while the U.S. Unemployment report indicated more U.S. economic weakness. Watch for a possible top to develop in this pair as the U.S. economy is worsening. Although some of this weakness may spread to Canada, it is clear from the action by the Bank of Canada that the Canadian economy is a little stronger than the U.S. economy at this time. Furthermore, a weak U.S. stock market may encourage traders to seek shelter in Canada. The only negative to the Canadian economy at this time is weakening commodity prices - especially gold and crude oil.

AUD USD closed lower for the week following a quarter-point rate cut by the Reserve Bank of Australia. This move was necessitated by the slowing Australian economy and lower commodity prices. There may be bullish news around the corner however as many traders feel the break in this market has been grossly overdone. This technical news is coming at a time when the U.S. economy is also showing more signs of a recession so the AUD USD may be ripe for a short-covering rally. More weakness in the U.S. stock markets may also encourage buying as traders will start to seek the higher-yielding Aussie Bonds. Short-term traders should look for a bottoming formation to take advantage of a rally. Longer-term traders should tighten stops and wait for a short-covering rally to reenter positions.