The greenback saw its largest one-day surge on record with the Dow Jones FXCM Dollar Index (Ticker: USDollar) soaring an unprecedented 2.13% in North American trade on Thursday. The advance came as stocks plunged with the Dow plummeting more than 500 points in its steepest one day drop since 2008 for a loss of 4.31% on the session. The S&P and the NASDAQ saw even steeper declines, falling 4.78% and 5.08% respectively. A host of factors contributed to the sell-off as investors jettisoned risk across assets classes on concerns regarding global growth prospects.
Overnight Japan’s Finance Ministry intervened in the currency markets in a unilateral effort to stem the rapid rise of the yen, which threatened the nation’s export-driven recovery. In addition, the Bank of Japan cited that it would expand its asset-purchase program to 15 trillion yen ($189 billion) from 10 trillion yen, confirming fears of ongoing weakness in the isle nation. The move comes just one day after the Swiss National Bank cut its interest rate to “as close to zero as possible” to curb the franc’s recent appreciation. Today, the ECB talked down speculation for future rate hikes after holding the benchmark rate at 1.50%.
ECB President Jean-Claude Trichet cited the “downside risk to growth may have intensified,” while warning that the risk to inflation remains to the upside. The balanced rhetoric saw interest rate expectations diminish with Credit Suisse overnight swaps now factoring in a zero percent chance of a rate hike next month. The UK also held interest rates after reports showed the economy grew just 0.2% last quarter with contraction seen in the manufacturing sector last month. With global central banks scurrying to avert a possible slide back into recession, equities sharply sold off as investors sought refuge amid ongoing economic uncertainty. With the yen seeing the largest decline since October of 2008, haven flows have come to the benefit off the swissie and the U.S. dollar.
An hourly chart attests to the greenback’s advance as the index broke above the convergence of trendline resistance and the 76.4% Fibonacci extension taken from the May 23rd and July 12th crests at 9525 before pausing at the 50% extension at 9605. Equity losses accelerated late in the day, boosting the dollar above the extension to 9622 by the close of trade. With Friday's crucial employment report on tap, the dollar may continue to consolidate ahead of the print, noting topside resistance at the 38.2% Fib extension at 9640 and 9685. Interim support now rests at the 61.8% extension at 9570 with subsequent floors seen at 9525 and 9450.
A look at the component currencies sees the dollar advancing against all its counterparts, highlighted by a 2.7% advance against the high yielding Aussie which moved 237% of its daily average true range. However the yen dwarfed this figure, moving a staggering 356% of its daily ATR for a loss of 2.30% against the greenback.
The highly anticipated economic docket has significant implications for the greenback with the July non-farm payroll figures on tap. As the political posturing on Capitol Hill subsided, the passage of the deficit bill eased concerns of a possible US default and subsequently the dollar has won back its haven status for nervous investors seeking safety. Consensus estimates call for a print of 85K jobs, a dramatic improvement from the dismal 18K seen last month. Although the unemployment rate is expected to hold at 9.2%, private payrolls are seen rising by 126K in July with manufacturing payrolls expected to add a mere 13K jobs. The data have the potential to exacerbate declines in equities and overall risk with a weaker than expected print which would undoubtedly fuel speculation of a global slowdown, or even a slide back into recession. Meanwhile, the dollar is likely to remain well supported here as concerns continue to weigh on market sentiment.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.