Strong Equities Drag U.S. Dollar Lower Ahead of North American Close

(CEP News) - The U.S. dollar started out strong, but is ending the day weaker across the board as equities prepare to close in positive territory for the third straight day.

It has been a volatile day in FX markets as the Swiss National Bank announced that it would intervene in currency markets to depreciate its currency.

While currency markets reacted to the central bank news, they shrugged off better-than-expected U.S. retail sales and another increase in U.S. weekly jobless claims. At 9 a.m. EDT, the SNB announced a 25 basis point cut.

"The value of the Swiss franc has increased substantially since the beginning of the financial crisis in August 2007. This currency development has gained momentum since the National Bank's last assessment in December. Under the present circumstances, this represents an inappropriate tightening of monetary conditions. In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market, to prevent any further appreciation of the Swiss franc against the euro," the bank said in its statement.

While the news supported the euro across the board, it also pushed the U.S. dollar higher across the board. The U.S. dollar index rose almost a full percentage point on the initial reaction. The index hit session highs at 88.545.

The U.S. dollar was able to hold most of its gains throughout the day despite strong equities. The sell-off started at 2:30 p.m. EDT and is picking up momentum into the North American close.

Currency strategists said the U.S. dollar made broad gains because some investors felt nervous about the aggressive action from the SNB, which caused a flight to safety.

"At this point I think the U.S. dollar is acting as a default currency," said Stephen Gallo, head of market analysis at Schneider FX. "Bottom line is that quantitative measures aren't good for currency markets. At the moment the U.S. dollar will continue to benefit."

Currency strategists will continue to watch equity markets to determine short-term direction for the U.S. dollar. There is a lot of doubt that equities will continue to make gains. Any signs of risk aversion will continue to support the U.S. dollar.

It has been a relatively quiet week for U.S. data. On Friday, markets will receive U.S. trade balance data and Reuters/University of Michigan consumer sentiment results. Economists expect that the U.S. trade deficit will narrow to $38 billion in January, following December's deficit of $39.9 billion.

Economists expect that consumer sentiment will continue to remain weak, falling to a level of 55.0 in March, following February's reading of 56.3.

Euro/USD up 0.58 cents to 1.2894

USD/CAD down 0.48 cents to 1.2804

USD/Yen up 0.54 points to 97.82

GBP/USD up 0.52 cents to 1.3928

AUD/USD up 0.04 cents to 0.6525

Euro/Yen up 1.28 points to 126.14

Euro/GBP up 0.06 pence to 0.9260

GBP/CAD down 0.03 cents to 1.7826

CAD/Yen up 0.72 points to 76.42

Euro/CAD up 0.12 cents to 1.6510

The U.S. Dollar Index is down 0.21 points to 87.66