Investor sentiment soured further as more problems from the credit crunch continue to emerge, and pushed the US dollar to new record lows. The fading dollar hit new record lows against the Swiss franc to break parity while the euro touched an intraday high of 1.5691. The US dollar also hit a 12 year low against the Japanese yen as they broke the psychologically important 100 level to hit 98.87. As investors lost their risk cravings, the commodity currencies tumbled lower, with the New Zealand and the Australian dollar taking the biggest plunge against the US dollar. The US dollar also picked up against the British pound as downward pressures persists for the financial markets, with mounting speculation that the BoE may be forced to follow the Fed as repercussions of the credit crunch spread.

The Federal Reserve essentially announced an emergency bail out for Bear Stearns Co as the financial giant faced liquidity constraints, saving the 85 year old firm from collapse. The Fed will work with JPMorgan Chase to resolve the current liquidity issue at hand, but some market participants speculate a doomed fate for Bear Stearns as JPMorgan Chase may consider buying out the failing firm. On the economic front, inflationary pressures eased as the headline and core Consumer Price Index remained unchanged. The growth in prices stalled as energy prices fell for the first time in six months, but is not expected to last as oil prices touched a new record high of $111 this month. Meanwhile, consumer sentiment turned increasingly dour as the University of Michigan survey fell to a 16 year low of 70.5, as many believe that the economy has fallen into a recession. The reading was actually a bit better than expected, optimism is clearly fading as growth prospects continue to deteriorate.

As investors questioned the survival of Bear Stearns, the stock markets took a drive as investors sold off higher-yielding assets. Consequently, the DJIA plunged 237.48 points to leave the index lower at 11,908.26, while Boeing and Alcoa were the only stocks to pick up out of the big 30. The broader S&P500 fell 29.53 points to hold off at 1,285.95 pints, with approximately 650 stocks dropping to a new 52 week low.

Persistent economic turmoil fueled risk aversion and raised US Treasury prices as investors sought after the safe haven of risk free bonds. Accordingly, the benchmark 10-Year yield plunged to 3.44 percent from 3.52 percent, with the 2-Year yield following as it dropped to 1.48 percent from 1.61 percent.

Looking ahead, all eyes will be focuses on the FOMC rate decision for March 18th released at 18:15 GMT, with market participants expecting a 50bp rate cut as the Fed works to improve growth prospects for the crumbling economy. Price swings for the US dollar could pick up as Monday will bring another dose of fresh economic data for the US, which include the Current Account balance, Empire Manufacturing, followed by the Industrial Production index.

Antonio Sousa is a Currency Analyst for FXCM.