Dollar demand is heavy again tonight driven by climbing Libor rates and optimism concerning the bailout plan (I know, we’re all tired of hearing about it). But mainly, it’s the need for dollar funding that’s taking center stage right now. Cross Currency swaps on EUR/USD are at a huge negative right now (about -120bps), meaning that people are willing to sacrifice interest gained on any euro exposure because they simply need the funding. It’s the highest its been since the euro debuted back in 1999.

Again, expecting SPX to continue in consolidation while we wait out the results from US Congress; there will probably be a tug of war here as the market remains uncertain and impatient for an answer. Bias is still leaning to the upside. This will keep USD/JPY in consolidation and related carry pairs, and could be a good time to take range-bound trades, anywhere from 50-100 pips at a time. USD/JPY is going to have a harder time falling, however, due to the current demand of the dollar and the lending situation going on here in the US. This is a newer fundamental trend which has gotten a focus that we haven’t really seen before, and is scarcely talked about in any kind of books you’ll read. Longs on pullbacks are the preferred play for the time being. 104.50

But wait, here’s some news: the ECB plans to drain 200bb euro out of the money market tonight, which will increase demand for euro. That should at least stabilize demand for USD a little bit and mute some downward movement on the pair. I’m looking to see USD demand taper off a little bit and focus to re-shift on these other pairs. As bad as the lending situation is here in the US, European and British banks are having a tough time as well – its all comparative. But for now, we’re in a heavy downtrend, yet seeing perhaps a bigger retracement from here to about 50 to 100 pips lower, when the bailout optimism wears off just a bit.

We have seen a lot of orders out there to keep volatility at a minimum, but yet to see the real affects of the bailout resolution. That should be coming soon.

For EUR, there’s a lot of resistance where price is now (1.3850 area), and 1.3840 is the 50% retracement of 1.1640-1.6040, and 1.3830 is support as well (low back on 9/18/2007). I’m looking to go long around here, short CHF. GBP also has good support where it is now and down to 1.7600 to 1.7590.