As the market starts to price in the possibility of a 75-bp cut in the fed funds rate, the US dollar is taking it on the chin. From Bloomberg:
The dollar fell for a fourth day against the yen and traded near a record low versus the euro on speculation a report will show U.S. retail sales stalled, threatening to end a six-year economic expansion.
The dollar declined versus 12 of the 16 most-active currencies as traders increased bets the Federal Reserve will cut rates by 0.75 percentage point on Jan. 30, the biggest reduction since 1984. The yen also rose on speculation slowing global growth will cause Japanese investors to pare purchases of overseas assets...
Retail sales were probably unchanged last month, after rising 1.2 percent in November, according to the median forecast in a Bloomberg survey before the Commerce Department releases the data at 8:30 a.m. in Washington...
Fed funds futures contracts on the Chicago Board of Trade show 100 percent odds the Fed will cut its target rate for overnight bank loans to at least 3.75 percent at its Jan. 30 meeting. The odds have risen from no chance a month ago. The odds of a decrease to 3.5 percent are 50 percent, compared with zero probability a week ago.
And this is even drawing an ECB official out to comment on the US dollar. From Ambrose Evans-Pritchard at the Telegraph:
Lorenzo Bini-Smaghi, a member of the European Central Bank's executive council, warned that the tumbling dollar may now start to foreclose the option of US rate cuts and force the Fed to keep monetary policy tighter than it would like.
"I would not be so sure about the movements of the Fed. There is a serious problem with the dollar in America. We will see what margins they have for further rate cuts," he told Italy's La Repubblica newspaper.
As if that's not enough, HSBC has brought up the possibility of the fed cutting rates by 100 bp by the end of January.
[HSBC's] highly-rated New York economist, Ian Morris, said a new tone of urgency had been struck by top US officials over recent days, raising the possibility of two sets of cuts this month...
HSBC said the Fed had now raised expectations so far that it risks setting off fresh "financial stresses" if it fails to deliver a serious shot in the arm.
"If the Fed were to cut inter-meeting, we think it would by 50 basis points, followed by another 50 basis points on the 30th," it said. The bank said this is a possibility, not a hard forecast.