The U.S. Dollar strengthened on Thursday ahead of Friday’s unemployment report. Some Forex markets weakened due to position evening while others softened because of central bank activity.

The rally today in the Dollar did not change the trend to up but did alleviate some of the oversold pressure that had been building over the past few weeks because of the tremendous demand for higher risk assets.  

The Bank of England started the rally in the Dollar with its announcement to extend its asset buyback program.  This essentially announced to the trading community that more British Pounds were going to be pumped into the system thereby weakening the currency.  The recent rally in the GBP USD has primarily been driven by speculators looking for the BoE to temporarily end the program because of improved economic conditions, so today’s announcement came as a surprise to traders.

The European Central Bank also met today to discuss current interest rate policy and its economic outlook for the near future.  Its choice was to leave interest rates unchanged citing that rates were “appropriate” given current economic conditions.  Comments afterward were not hawkish but did hint that the ECB felt economic conditions did not warrant any immediate additional stimulus.

The USD JPY rallied on Thursday despite the weakness in the equity markets.  The Yen has had a tendency to rally on days when the stock market exhibited weakness because Japanese investors repatriated their funds.  Today was a little different because a report is circulating stating that the Bank of Japan intends to leave interest rates at zero thru at least March 2011 in order to stop the developing deflationary scenario.

The USD CAD turned itself around after confirming a closing price reversal bottom earlier in the week.  Although the developing bottom has been labored, today’s weakness in the equity and crude oil markets offered a look ahead at what will be the catalyst to force the longs out of the Canadian Dollar and drive the USD CAD higher.

Weakness in the equity markets kept selling pressure on the higher yielding Australian and New Zealand Dollars.  Both of these currency pairs seem ripe for a correction but may need to get a push from sharply lower equity markets.  

The NZD USD looks weaker than the Aussie.  Traders should keep in mind that the Reserve Bank of New Zealand has left open the possibility of a rate cut before the end of the year.  The Australian economy is showing a sign of strength if today’s report announcing an increase in jobs is any indication.  Nonetheless, traders should be aware that demand for higher yielding assets is the key factor driving these markets higher.


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