The dollar index is up almost 0.2% as European stock indices fall in response to a few more Dubai-related tremors. Local markets slumped almost 7% as Arab investors watched the Dubai World debt rescheduling process unfold. So there appears to be something of a whiff of risk-aversion back on the agenda no sooner than the North American labor markets put in their best showing last Friday since the recession started in late 2007. But it wasn't supposed to be this way. The dollar is supposed to decline in response to better economic news, but now investors have moved from cold sweats to hot flushes over the prospects for dollar-supportive interest rate movements.

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U.S. dollar -The dollar has begun the week at its best level in more than a month against the euro and is trading at $1.4786. Investors continue to unleash commodity holdings, which are a dollar hedge. Friday's non-farm payroll appears to have given enough of a wake-up call to rethink their collective dollar nightmare scenarios. However, something feels rather odd about the dollar's more recent journey. There is a lacking in its conviction. We understand the snapback rally, but it does look typical of a sudden exit from positions rapidly flying in the face of latecomers to the party.

Much of the rally, which has seen the dollar gain against the euro from $1.5091 on Friday to $1.4756 on Monday, is due to a revision of interest rate expectations. But explain to us please why bonds have come in bid this morning as yields inch back from Friday's slump lower. We're not at all sure that the evidence of rising rates fits the picture at all when trying to pin this rally on a rise in interest rate expectations. The Fed's extended period as far as the longevity of easy money has come under fire. Ahead of Friday's jobs report the odds of an increase in official rates stood at about one-in-three. After the event the odds have shortened and according to fed funds futures, the probability now stands at 54%.

It would seem that there investors can't find a common ground between too cold and too hot when it comes to gauging the economy. The mysterious disappearance of Goldilocks form the economic scene only occurred when investors realized she was sponsored by an irresponsible mortgage industry. Yet since her demise, the porridge has been way too cold. The employment report has apparently served up a very hot serving for breakfast. Has anyone seen Goldilocks?

Japanese yen - The yen rose against all of its major trading partners. Recent declines have made it appropriate for exporters to repatriate foreign earnings. The yen continues to trade either side of ¥90 per dollar to start the week. In just 10 days the yen has conceded more than six yen to the dollar as risk aversion departed the scene.

Euro -The head of the Belgian central bank and ECB member, Guy Quaden today downplayed any sense of the embarkation of a monetary tightening period. The ECB has wrestled with this subject both internally according to off record comments and publicly as various speakers try to explain its movements. Mr. Quaden told reporters that on account of weak inflationary pressures, there is absolutely no need to start a rate tightening cycle.

Last week euro bulls drove the single European currency to its highest since the Lehman bankruptcy as they took the view that the ECB was getting closer and closer to making a move on rates. As fast as officials now downplay the significance of stepping away from fixed to variable repo tenders it feels as though global economic data is fast chipping away at its credibility. Yet all the ECB is trying to do is explain away the need for non-conventional stimulus measures. Its problem is making the market understand the difference between these and conventional liquidity measures. Once again that swing between hot and cold is exerting undue volatility on the forex patch.

The euro rose to 90.53 pence against the pound but declined to ¥133.30 to the yen.

British pound - The pound is weaker against the dollar as investors mull the other side of Wednesday's pre-budget report to Parliament. Investors are bracing for deterioration in the health of British finances, but this much we already know. The Bank of England concludes its two-day meeting and on Thursday will most likely leave monetary and QE policy alone. Low rates and fiscal laxity in the current environment will likely continue to weigh on sterling.

Aussie dollar - The Aussie couldn't maintain its early rise inspired by an ANZ job vacancy posting, which showed a 5.2% jump in openings posted in newspapers and across the Internet. The health of the Australain economy should be undoubted, for now at least. However, the so-called risk aversion theme to start the week got the better of investors who sold the Aussie back to 90.87 U.S. cents.

Canadian dollar -The Canadian dollar is taking back some losses sustained after Friday's U.S. employment reading trumped its own, which was five times the projected employment gain. The Canadian dollar is trading marginally higher at 94.45 U.S. cents.

Andrew Wilkinson

Senior Market Analyst