It was a rollercoaster ride for currencies in NY trading. The US dollar saw good buying once the hurdle of economic data was surpassed. The data itself was mixed to say the least. Initial jobless claims popped to above 480K (market expected 440K) but the increase was attributed to a statistical anomaly and thus the market ignored the report. The Philly Fed index of manufacturing activity followed and the headline disappointed here as well. More importantly, however, was that the new orders component dropped to the lowest level since March. This metric tends to lead overall manufacturing activity and thus is an ominous sign. Euro was initially higher on the worse US data but the 1.4100 zone provided an excellent barrier early on in the session.
The bombshell came around lunchtime in NY when Obama said in a speech that US banks should not engage in any form of proprietary trading. That Wall Street was surprised by this is an understatement and equities promptly dropped to their lowest levels of the day (closing down around -2%). The implications from this sort of legislation were also viewed as a major US dollar negative as it would likely elicit a good amount of capital outflows from the United States. EUR/USD soared in the blink of an eye from around 1.4040/50 towards the 1.4130/40 zone. The commodity currencies remained under pressure as well, with risk decidedly off.
Recent developments have seen some of the violent price action reverse course. Representative Barney Frank (of all people!) is opposed to the plan and Treasury Secretary Tim Geithner has also reportedly voiced reservations. Geithner's main concern (correctly so) is that Obama's draconian measures would hurt US bank's global competitiveness and have negative economic implications for the US overall. The backlash from within the party suggests this plan has little chance of seeing the light of day and this has indeed helped quell some of the US dollar negativity that followed immediately after headlines started to hit the tapes. You can be sure that all eyes will be on this one in the short-term!