The dollar's losses accelerated in the Friday session, tumbling to 1.2883 against the euro and 1.4482 versus the sterling as traders continued to pare their greenback positions ahead of the weekend. Global equity bourses struggled across the board, with the Dow Jones Industrial Average plunging to its lowest intraday level since 1997 at 7249.47. Meanwhile, spot gold rallied to its highest level since March 2008 at 1006.40 per ounce.
The foreign exchange market largely shrugged off this morning's US economic releases, which saw the January consumer price creep higher by 0.3% versus a 0.7% decline in the previous month and flat on an annualized reading. The core CPI figures were slightly higher than expected with the monthly reading at 0.2%, versus calls for an increase to 0.1% from a flat reading in December, while edging up to 1.7%, down from 1.8% in the previous year.
The markets remained worried over potential nationalization of Citigroup and Bank of America, as expressed by Senate Banking Committee Chairman Chris Dodd. Given the lingering uncertainty over the outlook for the banking sector, next week's government stress tests of banks' balance sheets will be closely scrutinized and likely trigger another bout of heightened volatility.
EUR extends gains
The euro rallied sharply to 1.2885 despite further reports of dismal Eurozone economic data. The Eurozone PMI slumped to 33.6, from 34.4 a month earlier, while the services PMI dropped to 38.9 from 42.2. Germany's February manufacturing PMI improved slightly from the previous month to 32.2 from 32.0 and the services PMI tumbled to 41.6 from 45.2 a month earlier.
We anticipate the euro to relinquish its gains next week as an environment of heightened risk aversion will likely continue to benefit the safe haven currencies. EURUSD will encounter resistance at 1.2860, followed by 1.29 and 1.2930. Subsequent ceilings are seen at 1.2965, backed by 1.30 and 1.3050. On the downside, we look for support to emerge at 1.28, followed by 1.2760 and 1.2730. Additional floors are seen at 1.27, followed by 1.2650 and 1.25.