US Dollar Strength May Hinge Upon Risk Trends Once Again

The US dollar ended the week mixed across the majors, as the currency tumbled against the British pound, which was strong across the board, but also slipped versus some of the commodity dollars on a brief pick up in risk appetite

The US dollar ended the week mixed across the majors, as the currency tumbled against the British pound, which was strong across the board, but also slipped versus some of the commodity dollars on a brief pick up in risk appetite. However, the US dollar’s biggest rally of the week was on Friday, after data showed that US non-farm payrolls fell by a whopping 524,000 in December and brought the cumulative total of job losses in 2008 to 2.589 million, the most since 1945. Meanwhile, the unemployment rate rose more than expected to a 16-year high of 7.2 percent from 6.8 percent. So why did the US dollar rally in response? There are a few reasons.

First, most of the major currency pairs remain within massive ranges, but major support levels for the US dollar helped to stabilize its decline. From a fundamental perspective, it is necessary to consider the fact that interest rates in the US can't really go any lower since the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent, and it is that interest rate dynamic (or lack of it), that is allowing the greenback to brush off this abysmal data. Furthermore, a sharp drop in the Dow Jones Industrial Average and surge in the Japanese yen on the same day suggest that risk aversion is lingering in the financial markets.

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