The U.S. Dollar experienced a choppy trade most of the day but ended up lower after a late session rally in the U.S. stock market slightly increased trader appetite for risk. The early part of the trading session was dominated by a stronger Dollar after the release of a weaker than expected PPI number. The first reaction following this report was to buy the Dollar to park money in the safety of the treasury market. Later in the trading session, another report further increased demand for the Dollar. Home Builder Confidence dropped to 9 from 14 the previous month. This encouraged more money to be moved to the treasuries.

While all of this activity was occurring in the Dollar, the U.S. equity market weakened. Late in the day the stock market rallied to close higher, triggering a short-covering rally in the Euro. Short-term traders have been trying to build a support base in the Euro. Longer-term traders are still bearish because the recession in the Euro Zone is likely to trigger a series of interest rate cuts because the European Central Bank has plenty of room to cut.

Another key report on Tuesday was issued by the U.S. Treasury. This report showed that capital inflows were up $143.4 billion in September. This report reflects the growing demand for U.S. treasury instruments. International demand is increasing because of the amount of risk in the markets at this time. Financial institution lending is down. These institutions are still hoarding cash as central banks act as lenders and continue to pump the financial system full of liquidity. In addition to the cash injections, many central banks still have room to cut rates. If you take away the central bank activity then the credit markets would remain frozen. There is very little lending activity going on from bank to bank.

The markets are experiencing a tremendous amount of risk at this time. This is leading to a repatriation of the Dollar. Global economies have weakened to the point where investors are settling for extremely low interest rates. The two-year note fell to a five year low on Tuesday. China also passed Japan as the largest holder of U.S. debt. Despite the easing in Libor and the flooding of the market with excess cash by the central banks, the bottom line is that businesses and investors have no tolerance for risk at this time. Countries are buying safety in the treasuries, financial institutions are hoarding cash and investors are attempting to do a little of both.

The British Pound showed more strength early in the trading session as inflation dropped more than expected. This is a benefit from a recession and interest rate cuts. Technical traders continue to talk of an oversold market. Additionally, some feel that it will be difficult to keep the GBP USD under 1.50 for a long time. Nothing has changed fundamentally. Unemployment is high, retail sales are down, and housing prices continue to weaken. Mortgage markets remain locked up because the lenders cannot seem to come to terms with the borrowers.

The Japanese Yen rallied into the close driven by the better than expected gain in the U.S. stock market. The market fears an intervention by the Bank of Japan if the Yen continues to appreciate. Exporters such as automakers are lowering profit forecasts for 2009. They need the support of the Bank of Japan at this time. There are reports that the Bank of Japan will intervene and increase the money supply at the same time. This should have a strong dilutive effect on the Yen.

The USD CHF should continue to rally if traders continue to feel adverse to risk. The U.S. Dollar is being treated as a safe haven with the blessing of the Swiss National Bank. Look for the weakening Euro Zone economy to take down the Swiss economy because of their strong ties to trade. Higher Libor has been hurting the Swiss National Bank’s ability to lower interest rates. If Libor comes down, then look for the possibility of a rate cut by the SNB.

The USD CAD traded higher on Tuesday. The threat of a deepening recession is leading to less demand for commodities such as lumber and crude oil Lower prices threaten the stability of the Canadian economy. Unless there is a turnaround in the demand for commodities, look for the USD CAD to continue to rally. Today's weaker than expected PPI is a strong indication that lower commodity prices are likely to continue.

The AUD USD was under pressure most of the trading day as the release of the minutes from the last Reserve Bank of Australia meeting showed that the RBA cut cash targets by 0.75 percentage points to 5.25. They cited the "marked deterioration in global financial conditions" as the main reason behind the cut. Lower equity and commodity markets should continue to put pressure on the economy which is likely to trigger another round of rate cuts. The Australian central bank has plenty of room to cut. Look for more weakness, but be aware of the possibility of an intervention if the expected down move gets too volatile or drops too much too fast.

A similar situation is occurring in the New Zealand economy. Pressure on the economy is coming from weaker commodity and equity markets. Exports are down as the global recession is lessening demand. Like Australia, the Reserve Bank of New Zealand is likely to cut rates in early December to help stimulate the economy. Trader aversion to risk is also seen as a negative toward the NZD USD.

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