USD - The dollar is weaker against nearly all of its major counterparts this morning as soft economic data has investors adding to bets that the Fed will ease policy further. Consumer prices fell by more than expected after both import and producer prices declined earlier in the week. CPI contracted by 0.3% versus last month's flat reading and the 0.2% decline that was anticipated. Meanwhile, weekly jobless claims and continuing claims both spiked higher to 380k and 3278k respectively. With the labor market showing signs of weakness and inflationary pressures clearly cooling, the Fed may soon be spurred into action to defend their two key mandates of ensuring maximum employment and controlling inflation. As recently as last week, Fed Chairman Bernanke told Congress that as always, the Federal Reserve remains prepared to take action as needed to protect the US financial system and economy in the event that financial stresses escalate. With the central bank set to meet next week, and with hotly contested elections this weekend in the Eurozone raising the stakes, investors are increasing bets that a third round of QE may be forthcoming. Expectations are also boosting stock and commodity prices, further sapping demand for the dollar's relative safety.
EUR - The euro rebounded back towards the top of its recent ranges as expectations of further easing from the Fed outweighs negative developments in the ongoing Eurozone debt crisis. In the most recent chapter, Spain's borrowing costs surged higher with the yield on a 10-Yr bond reaching 6.98% after Moody's downgraded Spain's credit rating to just above junk status. The move comes just days after EU members offered up to €100B EUR to recapitalize Spanish banks, which the ratings agencies say will add to Spain's already swollen debt burden. With yield's approaching unsustainably high levels, concerns are that Spain's debt load will become increasingly unstable possibly necessitating further external assistance. Meanwhile, reports have broken that France is seeking a Eurozone stability package with an announcement to come before an EU summit scheduled for the 28th. However, German Chancellor Merkel has made it clear that her government is in stark opposition of any plan for joint debt issuance. She went on to state that while Germay remains strong and the anchor of stability within the Eurozone, German strength is not infinite. As evidence, yields on German bunds are higher this morning for a third straight day as it appears that the instruments may be losing their safe-haven appeal. While the common currency may be back towards the top of its recent ranges, its upside potential remains severely limited by the ongoing debt crisis.
GBP - Sterling is mixed this morning, gaining against the USD while falling against the EUR. The move higher against the dollar comes as expectations of further Fed policy easing mount, but the resulting resurgence in risk appetite is causing it to fall against the EUR and its other higher-yielding counterparts. However, similar to the EUR, the pound's upside potential remains limited as a recent string of disappointing economic data adds to speculation that the BoE will ease monetary policy further in the coming months.
JPY - The yen edged higher against the dollar this morning as expectations of new Fed easing narrows the yield gap between the two currencies. However, with the yen again on the rise, policymakers may become increasingly outspoken with their displeasure with a strong yen. Interestingly, recent data shows that the number of imported products from domestic Japanese brands has jumped to an all-time high as the strong yen is forcing production overseas.
Commodity Currencies - The commodity linked currencies are generally higher this morning as risk appetite rebounds. Raw good prices are higher with crude reaching $83/bbl, copper rising to $335/lb, and gold gaining to $1618/oz even as inflation cools. The CAD's recent rally gained momentum this morning as the prospects of further monetary easing in the US - Canada's main trading partner - provides support. Similarly the MXN gained by nearly half a percent against the USD as investors assume riskier positions in search of higher yields. The AUD is higher, but still remains below parity with the USD as investors appear hesitant to get caught long Aussie above a key technical and psychological point of resistance under such volatile market conditions. The NZD gained after the RBNZ kept interest rates on hold and gave no signs of any imminent changes.