The US dollar dropped against eight of the G10 currencies overnight on evidence that the global economic recovery remains on track. Improving sentiment has encouraged investors to assume riskier positions, and move capital into assets that offer higher yields than the USD. Equities have extended their gains with the Dow Industrial Average remaining over the key 12,000 level for more than a week, commodities have eased, oil has continued its decline to $87.44 this morning after a week over $90/barrel, and sentiment regarding the Middle East has improved as protests in Egypt have remained fairly peaceful. There are however, valid fears that the political unrest and democratic movement may spread to Saudi Arabia, a key US ally and oil supplier. While the situation remains relatively calm, instability in the Arabian kingdom could prove detrimental to oil prices and prohibitive to global industry. With no major economic data to convince investors otherwise, the positive outlook for the US economy has encouraged currency investors to diversify away from the USD, at least in the near term.

As expected, Chinese officials hiked interest rates overnight, marking the third such tightening of monetary policy since October of last year. With high inflation in consumables like wheat and cotton, much like the rise in prices that partially sparked the recent unrest in the Middle East, the PBoC has moved to fight inflation with higher interest rates. The tightening has also been seen as a preliminary step towards Chinese officials allowing the CNY to gravitate towards its stronger, fair market value against the G10 currencies. While a report from the US Treasury last week stopped short of labeling Beijing a currency manipulator, they did state that the yuan remains substantially undervalued.

The euro gained against the USD this morning on generally improved investor sentiment despite more disappointing economic data out of Germany. A day after German factory orders disappointed at -3.4%, industrial production fell to 10%, missing expectations of 11.5%, and down from last month's 11.1%. If falling short of expectations becomes a trend for economic data out of the Euro Zone's core nations, the EUR may struggle to maintain its recent higher ranges. Bond investors have also become increasingly worried that the EFSF's success in selling its AAA-rated bonds to cover the loan it extended to Ireland may lure investors away from top-rated issuers such as Germany and France. The EFSF's inaugural bond auction last week, which was 9-times oversubscribed, yielded 57 bps more than German bonds of similar maturity, and threatens to crowd out struggling periphery economies as they are forced to maintain high yields to attract sufficient investor demand. However, in the short term, investors remain focused on generally improving global economic conditions, and currency investors have sought the slightly higher yield of the EUR over the USD.

Sterling slid this morning after British officials hiked taxes on banks, a sector that accounts for roughly 8% of GDP. Chancellor of the Exchequer, George Osborne, said that the new levy will raise 800M GBP as the government looks to cut its record budget deficit. The tax was expected, but not until a later date. Citing strong performance as their impetus, officials moved the levy up to raise the near $2B in the current tax year rather than next. With little other economic news in the UK ahead of this Thursday's BoE meeting, the pound will likely remain within its recent ranges, albeit towards the lower end.

The Canadian dollar is slightly lower this morning on the back of the Chinese hike in interest rates. The PBoC's decision to tighten policy for the third time in four months had an immediate impact on oil, Canada's main export, with the prices dropping by as much as 1.8% before recovering to down just 0.15%. The loonie did however remain well supported above parity with the USD, extending its streak as the stronger of the two to nearly two months, the longest run above parity since 2007. While strong economic data out of both Canada and the US will continue to provide support for the loonie, it will likely struggle to extend gains much beyond its two-year highs reached last week.

The Australian dollar has remained well supported despite the hike in interest rates in China, Australia's main trade partner. In recent months, tightening policy in China has weighed on the AUD as investors fear that tighter policy could prove prohibitive to the Chinese economy, and thus sap demand for Australian exports. With continued strong growth in China, the AUD will likely remain well supported above parity with the USD.

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This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.