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• US Dollar Rallies as the Fed Takes another Step in the Hawkish Direction
• British Pound Tumbles as the Outlook for a Robust UK Recovery Fades
• Euro Finds Little Support from Germany's First Steps towards a Stimulus Exit, Rising Business Confidence
• Australian Dollar Traders More Concerned Over Risk Trends than Confirmations of Financial Stability

US Dollar Rallies as the Fed Takes another Step in the Hawkish Direction
The dollar has fallen on hard times recently. First, the currency was finding selling pressure as the market reversed course on volatility; then there was the discussion over the ballooning deficit and calls for a new reserve currency; and most recently, the dollar's woes have been tied to a record low benchmark rate presenting an unusual candidate as the market's top funding currency just as carry comes back into vogue. However, looking out over three to nine months; will these considerations still be weighing the world's most frequently-traded currency? For sure, the deficit will still be sore spot; but the other troubles will have more than likely dissipated by then. What will be the turning point? A rebound in US yields that both makes it competitive globally and reflects a normalization in financial conditions as well as a return to sustainable growth.

It may seem like such a dramatic shift is a long way off; but the first steps have already been taken. Offering a more concrete, bullish move than the subtle shift in the FOMC's comments following yesterday's rate decision; the central bank announced today that it will scale back some of its emergency lending programs as financial conditions and access to funding were improving. The Term Auction Facility (TAF) will be trimmed to a $50 billion auction for 70-day funds from $75 billion in 84-day maturities this month. This reduction is aimed at eventually aligning these ‘long-term' funds to the ‘short-term' $25 billion, 28-day cycle. Along the same lines, the Term Securities Lending Facility (TSLF) auctions would be scaled back from its current size of $75 billion to $50 billion next month and $25 billion in November and December. Also notable was the Treasury's assistant secretary for financial stability Herbert Allison's testimony before the Senate Budget Banking Committee in which he said the financial authority was winding down its own programs and would proceed with its Public-Private Investment Program next month at a smaller than initially envisioned scale entailing a $30 billion investment from the government. It is difficult to keep track of all these programs; but the take away from these alterations is that the government is confident enough in financial conditions to start removing the support that has long held the market aloft. What's more, this means the US is on the same path towards event rate hikes as its global peers.

As for data, initial jobless claims beat expectations while existing home sales figures fell short. First time filings for unemployment benefits for the week ending September 19th fell more than expected to a 530,000 annual pace - a two-month low and additional support for the bullish trend that has developed since April. As for the NAR's home sales figure, the 2.7 percent drop through August surprised as economists had predicted the fifth consecutive monthly improvement. Yet, the monthly slip follows the sharpest increase on record the previous month and was accompanied by the lowest level of inventories since April of 2007 as well as another drop in the median sales price. Overall, there is still a clear bullish trend in this sector. Tomorrow, we will have another round of notable indicators (durable goods orders and new home sales for August); but commentary from the G-20 could easily steal the show depending on what topic it covers.

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British Pound Tumbles as the Outlook for a Robust UK Recovery Fades

While the broader market was generally more volatile today, it was the British pound that would take the title of top mover. Commentary and speculation throughout the London session would eventually lead the single currency to a 280-point plunge against the dollar and 120 points measured against the euro. Some of this morning's momentum can be tied to a report from the UK's Telegraph which suggested the BoE had called economists to a ‘crisis meeting' where the pound's appreciation, quantitative easing and perhaps lowering the deposit rate could be discussed. A spokesperson for the central bank later denied any such meeting had been called; but these issues are nonetheless in the back of most market participants' minds and therefore represent a real fundamental concern for the currency. Tempering any relief that may have been found in the dismissal of such a meeting, BoE Governor Mervyn King kept to the doom and gloom in an interview with the BBC in which he said two major UK banks were on the brink of collapse when the financial markets seized on October 6th of last year. With comments like these, a recent vote for a greater expansion to the bond purchasing program and musings for the deposit rate should be cut to encourage lending; it is obvious that the policy maker is not confident in the United Kingdom's recovery. And, he may have good reason. Chancellor of the Exchequer Alistair Darling reminded us that the government will soon have to curtail spending soon - though he said such cuts will be sensible and measured. Regardless, Moody's announced such policy changes meant the nation's banks faced very notable credit rating cuts.


Euro Finds Little Support from Germany's First Steps towards a Stimulus Exit, Rising Business Confidence

It seems that the G20 meeting has inspired some nations to announce the initial steps to an exit strategy. Before the Federal Reserve announced the reductions to its emergency programs, Germany's Federal Finance Agency announced that it was reducing its proposed issuance of debt through the fourth quarter from 75 billion euros to 59 billion euros. The group said the change is in response to improved funding conditions. This is not a definitive move for an extensive exit strategy; but it nonetheless suggests the government is confident enough to take the first steps. In other news, the German IFO business sentiment survey showed a pickup in sentiment through September - though it was a smaller increase than the official consensus was calling for. Nonetheless, the headline reading rose to a one-year high of 91.3 while the expectations component rose a ninth consecutive month. More importantly, even the lagging current conditions data saw its fourth increase.


Australian Dollar Traders More Concerned Over Risk Trends than Confirmations of Financial Stability

With economic forecasts improving and monetary and fiscal policy tightening in other industrialized nations, the Australian dollar may be losing some of its advantage in the FX market. Early in the Asian session, the RBA released its bi-annual Financial Stability Review. Traders are chomping at the bit for rate hikes from the strongest economy amongst the majors; but the policy authority merely stated that the nation's financial system has remained resilient. If Governor Stevens and his policy officials can't turn this optimistic outlook into tangible returns for currency traders, it may mean little as the rest of the world catches up in the global recovery.

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com