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Following the U.S. Treasury’s announcement to inject $250 billion into financial institutions this week, the dollar finally appears to have broken its 3-day downward trend against the other major currencies. The dollar was traded at $1.3575 against the EUR at the end of yesterday’s trading session after climbing steadily to 1.3767 over the course of the last few days. The previous appreciation of the USD was largely due to the reluctance of banks to lend to one another, which spurred a surge in demand for U.S. currency funding in global money markets. However, the Federal Reserve announced that it would offer European banks as many dollars as needed, and at a fixed interest rate, which has caused the dollar to slip against the other major currencies in recent sessions as an increased supply of USD is expected to ease demand.

As a result of the aggressive steps taken to pump cash into troubled banks, investors have started to unwind safe-haven trades in the USD which has also caused a correction to the greenback’s recent upswing. However, even after the latest measures by global governments to flood banks with cash, inter-bank lending rates were not expected to fall so quickly. It is still too soon to determine whether this move is going to end up causing bearishness for the USD over the long run, or if it will help stabilize the economic system.

Traders have an important day of trading ahead of them today. Starting around 12:30 GMT and lasting throughout the day, a stream of announcements and economic indicators will be released by the American economy followed by speeches from Federal Reserve Board Chairman Ben Bernanke and a speech by FOMC member Donald Kohn about the state of the U.S. economy. With important figures such as Retail Sales and the Producer Price Index (PPI) being released, traders can expect some heavy volatility in USD trading throughout the day.

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The Greenback saw mixed results yesterday against its major currency rivals as the absence of any fundamental data left the USD movement in the hands of market speculators. The USD began the day bearish inching every so close to record lows against the EUR before it rebounded after U.S. Treasury Secretary Henry Paulson announced a rescue plan with tighter mortgage regulations for the failing mortgage lending giants Freddie Mac and Fannie Mae. The EUR/USD fell from 1.5961 to 1.5864 during the short period after that, hitting daily lows near 1.5841. It didn’t take long though for the USD to take a hit as US Stock markets couldn’t shake the poor economic outlook and the EUR/USD closed the day one again over 1.59.

The approval of new mortgage lending rules by the Fed is focused at forcing lenders to revaluate whether borrowers can repay the loans they take out, and limiting who can take loans in general. The move comes not to long after the Fed was given more power to control the broader spectrum of the US economy as the look to calm market concerns about the health of the U.S. credit and housing sectors and restore investor confidence. For many analysts the USD recovery will depend on whether the Fed initiatives were enough to calm investors’ worries over the poor state of two of the countries biggest lending firms. Any improvement in their credit spreads and shares may help the dollar regain some strength.
Today should be vital in mapping the short-term movement in the USD as investors should expect a batch of mixed US data. Core Retail Sales and Retails Sales are both expected to see small gains, as it seems that US investor confidence is still not all together broken. The expected 1% increase in Core Retail Sales and .5% rise in overall Retail Sales will show that despite rising energy prices and a faltering credit and housing sector, tax rebates are being spent. Also on tap, Producer Price Index looks to stay unchanged and could help contribute to any positive movement in the USD. Still though, these events will likely be overshadowed by Federal Reserve Chairman Ben Bernanke, who will give his semiannual monetary policy testimony before the Senate Committee on Banking, Housing, and Urban Affairs, in Washington DC; A hawkish statement and mostly unchanged rhetoric can be expected from Bernanke, however he will likely come under significant scrutiny to discuss the current state of the US economy and whether or not the steps to bail out Freddie and Fannie will really help he US economic outlook and in turn the dollar. Expect his remarks to contribute once again to a highly volatile trading day in the Forex market.

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