US Dollar, Japanese Yen Remain Currencies of Choice as Djia Tumbles 2.94%, Retail Sales Plunge

The US dollar and Japanese yen remained strong on Wednesday as risk aversion remains a very real theme in the markets. The biggest piece of evidence of this: increased demand for Treasuries, the 2.94 percent drop in the Dow Jones Industrial Average, and the nearly 6 point rise in the CBOE’s VIX volatility index. Meanwhile, the release of the US Advance Retail Sales index proved to be even worse than expected, as it fell 2.7 percent during the month of December alone. This marked the sixth straight month of contraction and the worst string of declines since recordkeeping began in 1992, but is particularly negative because the holiday shopping season is supposed to be a boon for retailers, but even the most aggressive discounting wasn’t able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. With job losses continuing to climb, the dismal retail sales results may be just a part of a rather consistent trend through the first half of 2009.

Going forward, risk trends may continue to determine price action for both the US dollar and Japanese yen, as we’ve seen that at this point, fundamentals have little impact on the currencies. Throughout the day on Thursday, multiple members of the Federal Open Market Committee (FOMC) will be speaking on the economy and monetary policy, including Atlanta Fed President Dennis Lockhart, Chicago Fed President Charles Evans, and San Francisco Fed President. Comments by FOMC members tend to be very market-moving, especially when it comes to interest rate expectations, so traders should keep an eye on the news wires as they could have negative or positive implications for risk sentiment.

Euro Down Ahead of ECB Rate Decision, But Could EUR/USD Ultimately Rally in Response?

The euro slipped for yet another day versus the US dollar and Japanese yen, as a combination of risk aversion and speculation of a rate cut by the European Central Bank (ECB) on Thursday morning weighs on the currency. According to Credit Suisse overnight index swaps and a Bloomberg News poll of economists, the ECB is likely to cut interest rates by 50 basis points to match the 2005 record low of 2.00 percent. This easily leaves the 7:45 ET announcement as one of the most important pieces of event risk this week, but traders will also have to look out for comments by ECB President Jean-Claude Trichet during his post-meeting press conference at 8:30 ET.