Dollar Hits YTD Highs, Stocks Plunge, What Happened?

Source: Forex.com

Volatility has ripped through the financial markets with the Dow Jones Industrial Average plunging 344 points and the US dollar surging to a year to date high against the Euro.With the exception of the dollar's performance against the Japanese Yen, the greenback's strength has been universal.In yesterday's Daily Currency Focus, we said that the dollar could see a near term reversal.That happened briefly with the EUR/USD hitting an intraday high of 1.4545, but once the US stock market started falling, the dollar resumed its rise.Given the drop in equities and bond yields, the only explanation for the divergent move in the currency market is risk aversion.The dollar has once again received a flight to safety boost.The sharp sell-off in carry trades including USD/JPY provides further evidence that risk aversion is behind today's move.

Service sector ISM was stronger than expected, but the leading indicators for non-farm payrolls point to an ugly NFP number.Payroll provider ADP reported more private sector job losses, continuing claims hit a 5 year high while the employment component of service sector ISM sank deeper into contractionary territory.In our Non-Farm Payrolls Preview, we show the correlation between NFP and ISM and talk about why payrolls could have fallen by more than 100k in the month of August.Comments from Federal Reserve officials also gave stock traders further reasons to liquidate.San Francisco Fed President Yellen expects growth to be “subpar” and sluggish in the second half of the year while Dallas Fed President Fisher warned about the government's potential problems in paying retirees their Social Security and Medicare as the biggest threat to the US economy.If the US government does have problems making these payments, then Fisher is absolutely right and the US could be dealing with slower growth for longer than anticipated.

The market is currently expecting non-farm payrolls to drop by -75k and the unemployment rate to remain unchanged at 5.7 percent. Of the 76 economists surveyed by Bloomberg, only 11 expect non-farm payrolls to crack the -100k mark. For traders, this means that -100k is the make it or break it point for the US dollar. If less than -100k jobs were lost last month, the dollar could continue to rise. If more than -100k jobs were lost, expect a reversal in the US dollar.