Bold and creative liquidity initiatives by the U.S. Federal Reserve, backed by the European Central Bank and the Swiss National Bank, calmed financial markets for the first half of the forex trading week; however, meltdowns at multiple major financial institutions, including Drake Capital, Carlyle Capital, and Bear Stearns, sent global equity markets tumbling and forced the U.S. dollar to record lows against the Euro and the Swiss franc, and to its lowest point in twelve years against the yen. Writedowns at major financial institutions currently stand at US$195Bn; Standard & Poor’s estimated projection totals US$285Bn, signalling the worst of the credit crisis may be over.

An unexpectedly sharp fall of 9.1% in Australia’s consumer sentiment index may signal the end of the RBA’s tightening monetary policy cycle and possibly the end of AUD’s rise, although it is too early to call for lowering interest rates. AUD/USD attempted to crack the 0.9500 level for the fourth consecutive week but again fell short, closing Friday at 0.9370.

The Fed’s pledge to accept mortgage-backed securities as collateral from primary dealers, and its announcement of further coordinated action with two major European central banks, buoyed financial markets through Wednesday. However, illiquidity rumours at Bear Stearns, denied twice over three days, became a self-fulfilling prophecy and the firm was forced to seek short-term financing and possibly permanent funding through JPMorgan Chase & Co. and the New York Federal Reserve on Friday, shocking investors into a renewed flight to quality and sending the VIX volatility index above 30. Lost in the panic was the U.S. inflation report, pleasantly surprising to the downside, although February retail sales disappointed and the coming flurry of expectedly poor real estate data over the next two weeks may drag USD even lower.

The Fed meets this week and is expected to announce a rate cut of 50–100bps Tuesday. If USD continues to collapse beneath EUR, CHF, and JPY, early action, as witnessed in January, is possible.

In the Eurozone, growth worries battle with escalating inflation, which touched 3.3% in February. Although the strong EUR, rising in tandem with the record price of oil, mitigates inflation, it undermines purchasing power and decreases export competitiveness, forcing the ECB into a difficult bind as to interest rates. Despite the ECB’s dilemma, EUR/USD continued to climb through the forex trading week and could surpass 1.6000; assessments of that party’s demise proved groundless.

With the U.S. slowdown working its way north of the border, the Canadian dollar continues to trade within approximately three cents of parity with USD. No change is anticipated.

The political furor over Bank of Japan’s leadership, intended by the minority party to force elections, could if allowed to continue interfere with the nation’s monetary policy; however, JPY continues to trade as a safe-haven and funding currency rather than on economics, and the recent spate of risk aversion caused dramatic appreciation. USD/JPY closed Friday below the psychological 100 level, at 99.32, and could go lower.

The Swiss National Bank kept interest rates on hold at 2.75% Thursday. With the escalation in the global credit crisis, the franc smashed the psychological parity point with USD and set record lows, reaching 0.9971 before closing Friday at 0.9987; again, the currency pair could fall farther.