The USD fell sharply overnight driven lower by continuing market turmoil and uncertainty in global financial markets; main story is the filing for bankruptcy protection by Lehman Brothers adding more fuel to the fear of a market meltdown. Although BoA has agreed to purchase the troubled brokerage firm forex traders don’t see the issue as resolved due to the large exposure other firms have to both Lehman stock and counterparty transactions. Stocks of major brokerage firms are called to open sharply lower in New York when equities open later today and with the potential panic that could hit the street it would be likely that the USD will suffer more volatility. Overnight the USD fell to two-month lows against the Yen dropping to a low print of 104.52 before recovering slightly; news that the PBOC cut interest rates and reserve requirements helped propel the Yen higher although the USD/JPY whipsawed with high volatility as would be expected on a surprise announcement. USD would have fallen farther in my view if the Asian markets would have been open; Japan, China and Korea all closed for a holiday today. I would expect more follow-on selling of the USD/JPY in the coming days; the rate opens New York at 105.20 area. GBP gapped higher and ran for a high print of 1.8130 before aggressive sellers capped the move and reversed the pair; traders note that most of the move was short-covering and panic buying from the news released. After scoring the high prints the rate reversed to fill the gap dropping back for a low at 1.7820 at the start of New York trade. Dragged in both directions by GBP volatility, EURO rallied into large stops as well for a high print of 1.4482 before reversing; low prints in early New York at 1.4119 making a mess of balance sheets. Traders note that cross-spreaders have been hitting the non-USD crosses hard on the buy side suggesting that the volatility is not limited to only USD; the global economic slowdown affects everyone and the cross-rates are being hit as well suggesting a flight out of USD-based assets. Oil is off sharply as well today suggesting that more conflicting news is on the way but in my view, lower energy is not driving trade; panic is driving trade as late USD longs get squeezed. Look for the USD to continue all over the board the next few days.

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