Currency markets mainly consolidated ahead of tomorrow’s non-farm payroll report. The ECB extended its unlimited cash to banks throughout this year, an attempt to not take away special liquidity measure when financial markets remain fragile. US data showed labor productivity slid in the 2nd quarter – a sign companies may have to start hiring, while a measure of pending home sales surprised on the upside – a rare positive release for the US housing market.

Manufacturing releases from China and the US, and a very strong 2nd quarter GDP report from Australia helped to propel global stocks to strong gains. In NY morning trading the Dow Jones Index for instance was up 240 points. That helped “”higher yielders” like the Australian and Canadian Dollars, the Euro and the Pound gain on safe haven currencies like the US Dollar.

The US Dollar slid against its major rivals as higher global equities helped to dampen demand for safe-haven currencies like the US Dollar and Japanese Yen. The weakness in the Dollar overnight was also due to the weak data that has come out this week, which has led to increased speculation that Fed Chairman Bernanke may suggest further quantitative easing during his speech on Friday at the Jackson Hole Symposium.

US jobless claims rose to their highest in 9 months, while the Philly Fed manufacturing index turned unexpectedly negative. The fear of a double-dip recession will rise as a result. Currencies tied to risk appetite like the Australian and Canadian Dollars suffered, and the Dollar slipped sharply against the Yen. The European majors – Euro and Pound – consolidated for the most part, staying with recent ranges, though the UK did post strong data giving the Pound a pop.

Risk appetite rose in today’s trading, helping higher yielders to gain on the USD and other safe-haven currencies as a closely watched Ireland government debt auction was successful, and US industrial production showed a strong 1% rise in July. That helped equities and commodities to rally, boosting the Canadian and Australian Dollars.

What is causing this move towards the US Dollar, where we see the Fed confirming a slowdown in the economy? It’s simple. The malaise from a weaker economy that has put the greenback on the backfoot, is now spreading to the world as investors become concerned about that the global economy will sputter. The Yen was a big gainer as well, and the USD/JPY broke through the 85.00 barrier, falling to a 15-year low.

In addition to the weak US economy, other alarming signs about global growth have begun to spring up. China’s domestic consumption was questioned following weak import growth in its recent trade data. Overnight, data showed industrial production growing at its slowest pace in 11 month, retail sales growth eased, and new loans climbed less than estimated.

The US trade deficit in Tuesday’s morning NY session showed US exports declining on the month, a sign that global trade may be retrenching.

In the UK, the Bank of England said inflation will be at about 1.5% in two years and downgraded its forecasts economic growth compared to its figures in May. It said economic growth may peak at 3% annual pace instead of the 3.6% forecast previously. These findings were released with the Bank of England’s Inflation Report.

The Nikkei 225 was down 2.7%, main European indexes were down more than 2%, and US stocks opened sharply in the red a the Dow Jones Index shed 200 points at the open.

Put together, a weaker US, the Chinese economy cooling, and weaker expected growth in the UK, all shook investor confidence, with stocks around the globe falling sharply. That led to investors seeking safe-haven in the form of the US Dollar and Japanese Yen. The Euro, Pound, commodity currencies like the Australian, New Zealand and Canadian Dollars tumbled.

In overnight trading prior to the FOMC decision we saw markets in a state of risk aversion, with the Dollar gaining on growth-sensitive currencies like the Aussie, Loonie and Pound. The initial spark was a trade report from China showing the economies imports growing by less than expected casting some doubt over domestic demand there. With uncertainty ahead due to the FOMC, traders bought Dollars, something we haven’t seen in a little while.

A weaker than expected monthly jobs report caused traders to sell the Dollar as it means the Fed is likely to keep interest rate low for longer or introduce some type of quantitative easing – both negative for the greenback. US stocks fell more than 1%. German industrial production and Canada monthly job report were also weaker than expected.

The ECB and BOE held rates steady and didn’t offer too much in the way of new information. A weak US jobs report however hurt risk sentiment, which caused higher yielders to give up earlier gains to the greenback. The Swiss Franc gained on news it was selling its currency reserves, while the New Zealand Dollar weakened following a report showing its unemployment rate rising.

The ISM non-manufacturing index rose to 54.3 in July from 53.8 in June. Economists had expected the survey to slow further. The news helped calm some of the fears about further quantitative easing from the Fed and helped the Dollar gain against the Euro and Yen.