While the dollar managed to bully everything else lower on Tuesday especially after risk was discouraged by a poor showing from a gauge of homebuilders' confidence, today it is once again on the defensive. The euro's recovery has lifted it to a session high of $1.4972 ahead of Wednesday's key homebuilding and consumer price reports. Ironically, analysts are seeking a boost to new home starts driven largely by government tax credits. If the data can carry the weight of expectations, it's likely to be dollar negative and euro positive, which means we might finally see another assault on the $1.50 area. Having tested the upside for the dollar it will now be no surprise to see the euro test its upside potential for the remainder of the week.

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A policy split at the Bank of England has sterling under the spotlight today. In the grand scheme of things the pound is down only slightly at $1.6806 masking far greater dollar weakness this morning, while it's also down to 88.96 pennies per euro. It's not so much the split that undermined the pound, rather it's the revelation that the near-term outlook for British growth inspired the MPC to expand its bond buying plans. There will also be more downwards pressure on short-term interest rates if the Bank of England follows through next month with discussions revealed in the minutes of its November meeting to reduce the deposit rate paid to the reserves of the banking system.

Sterling's fortunes today seem to hinge on the prospects for a similar extended period of low rates as is evident in the United States. What the market chooses to overlook today within the minutes is that several members within the MPC felt that by stepping up the bond purchase program by £25 billion to £200 billion it might accelerate the day of reckoning. By adding more funds the members felt that reversal of such policy might be required sooner rather than later. Yet it was a softening in interest rate expectations along the curve that seemed to undermine the fortunes of the pound today.

In overnight trading in the Asian markets the Aussie dollar was weaker and has only steadily recovered its poise. Apart from labor costs there is little to excite and traders continue to digest the dovish RBA minutes from earlier in the week. The Aussie dollar rose into the New York opening and currently buys 93.27 U.S. cents.

The Canadian dollar is also higher versus its U.S. counterpart after a Canadian consumer prices report came in largely as anticipated. The monthly change in the CPI for October was -0.1% after an unchanged reading in September. The expectation was for a 0.1% gain. The year-over-year change of 0.1% was bang in line with expectations. The Canadian dollar buys 95.51 U.S. cents.

The Japanese yen is weaker per dollar at ¥89.15 and highlights risk-on positioning today. Earlier in the week stronger Japanese growth data raised the prospect of a return to domestic-led demand. Only time will tell whether the boost does come from Japanese consumers or whether it represents an inventory build coincident with government stimulus measures aimed at encouraging green and electronic spending.

Along with the GDP report came unwelcome and worrisome evidence of a return to deflation for Japan, which is prompting the theory that the government should act to weaken the currency by open market sales in order to encourage exports. We're unsure where this debate might go since the incumbent DPJ party appears vey much behind allowing the yen to find its own level. Finance minster Fujii openly stated that it would be acceptable if this means that the yen strengthens as a result of economic growth. Today the yen is lower against the euro at ¥133.41.

Andrew Wilkinson

Senior Market Analyst