USD – The dollar consolidated within its recent ranges overnight as financial markets remain relatively stable headed into the weekend.  Investors were met with better-than-expected data this morning with U. of Michigan confidence jumping to the best level since before the recession began five years ago.  The measure gained to 83.1 from 78.3 in the previous reading, coming in far better than the expected decline to 78.0.  Participants are hopeful that an improving labor market, rising property values and a stronger economic outlook will translate into better sales at the retail level.  Elsewhere, the producer price index gained by more than expected, rising 1.1% after a 1.7% rise in the previous reading.  The larger than expected jump reflects higher fuel costs, but with the volatile energy and food components stripped out, the measure was flat for the first time in nearly a year.  However, with the global economy facing significant headwinds, businesses may find it difficult to pass on rising energy costs, thus limiting the impact on headline inflation.  Investors also took note of rather hawkish commentary from Fed member Plosser yesterday when he told reporters that “monetary policy is likely to become tighter more quickly than the [FOMC] anticipated.” 

EUR – The euro is higher for a second straight day against most of its counterparts amid speculation that Spain is close to requesting assistance from the ECB.  The market has largely ignored S&P’s latest downgrade of the troubled nation, cutting its sovereign debt rating to just one notch above junk status, with the yields on Spanish debt actually falling.  However, Spanish Economy Minister Guindos has denied that his country will soon seek assistance, but he also told reporters that Spain’s deficit forecasts will likely need to be updated in November.  Consequently, next week’s EU leaders’ summit in Brussels will be closely watched with investors looking for any hints of a Spanish request.  Moreover, with the European Union having been awarded the Nobel Peace Prize yesterday, EU politicians may be more inclined than usual to embrace solidarity.  The common currency thus remains towards the top of its recent ranges as investors price in a relief rally should Spain seek external aid.  Elsewhere, German Chancellor Merkel signaled a potential tax cut to stimulate domestic demand with the region’s largest economy expected to grow just 1% in 2012 and 2013. 

GBP – The pound is stronger this morning against both the USD and EUR despite signs that the British economy is still struggling to emerge from recession.  A report released this morning showed that house prices fell for a third-straight month, suggesting that GDP may continue to contract through the end of the year.  Nevertheless, the modest improvement in risk appetite is providing support for the sterling. 

JPY – The yen maintained its losses overnight as Japanese policymakers kept up with their recent interventionist rhetoric.  Since his appointment, FM Jojima has been harping on the recent “one-sided” and “disorderly” gains in the yen.  However, with the USD/JPY pair having only traded in a 5% range over the past six months, the Japanese authorities might need a different argument to justify any actions.

Commodity Currencies – The commodity linked currencies are relatively flat this morning with raw good prices little changed.  The CAD is trading within the narrowest range against the USD in more than a month as investors gauge whether measures taken by global central banks will be enough to jumpstart the world economy.  Elsewhere, the loonie is lower against most other major currencies as investors seek higher yields in emerging markets.  The AUD fell back towards the lower end of its recent ranges as the price of iron and copper – some of Australia’s main exports – have failed to rise despite the recent improvement in investor sentiment.  Meanwhile, both the MXN and ZAR are higher this morning as investors seek their relatively attractive yields and strong growth prospects.   

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