A period of change appears to be in full swing leading to a bout of dollar weakness in early running. In my column yesterday I reflected on a call to enter short euro positions at $1.30 with my point being that should that price be reached, you could bet your bottom dollar that traders' psychology would have changed sufficiently as bearishness wears off. Low and behold the euro is surging higher this morning after investment banker Goldman Sachs reversed its call for euro weakness, pegging a six-month target of $1.35 and a one-year target of $1.38 for the euro as it softens its stance on the fiscal crisis. The forecast, however, maintains a three-month prediction of a further euro setback resting on the outcome of the forthcoming stress tests for European banks.

U.S. Dollar - The dollar index has slumped 0.6% this morning as the dollar loses ground to the Swissy, British pound and euro. Some of the drubbing is caused by deeper reflection on Wednesday's FOMC minutes out of which analysts derived a sense of fear that Fed officials sensed deeper dangers arising from stubbornly high unemployment as inflationary pressures start to ease. There was discussion about the possible need to ease its quantitative policy further still in contrast to discussion in April centered on how to start unloading bond purchases to start the exit strategy. With a swift reversal so soon after this discussion, no one on the FOMC came prepared with suggestions on what to do next.

Currencies are also responding today to the overnight release of a batch of Chinese statistics evidencing the widely anticipated growth slowdown. However, the assessment in the aftermath of a cooling to a quarterly growth increase of 10.3% compared to the same period in 2009 is that China has steered a well-balanced cooling of its economy in the face of the major challenge of assessing outside and domestic economic needs. The decline in the pace of growth is the result of a lower impact from policy stimulus and lower loan growth as the government attempts to alleviate strains on the housing market where speculation has caused a policy dilemma. The economy appears in a strong position to take on the remainder of the year and at its present pace of growth carried forward a significant amount of momentum into the second half.

The pace of consumer price inflation eased in June to 2.9% from 3.1% and pleasingly for the government price pressures shocked to the downside in light of the forecast pick up to 3.3%. Along with the recent de-pegging of the yuan the inflation outlook bodes well for monetary policy where there no appears less need to take further action, if at all. According to the National Bureau of Statistics in its statement the Chinese approach of active fiscal and moderately loose monetary policy remains intact. And while the rest of the region and indeed the world remains possibly too concerned over the pace of Chinese slowdown, the China remains vexed by the complex and challenging international growth environment.

Euro - The single European currency has come within a whisker this morning of $1.2850. A Spanish auction of €3 billion in 15-year bonds received over two-and-a-half-times the number of bids and outpaced demand at the last similar auction during April. July marks a big hurdle for the Spanish government, which faces the high-water mark of €22 billion in redemptions. Given today's response it appears that on an ongoing basis investors are less stressed about the peripheral nations than was thought weeks and months ago.

Also boosting the euro is the fact that macro events appear to be favoring the Eurozone given the slowing of the U.S. economy. While most investors shunned the euro earlier in the year because they thought the 16-nation area would see activity grind to a halt, they couldn't have been further off base. Output has actually accelerated and with FOMC officials observing worrisome signs about the health of the U.S. economy the market is warming to a euro fast-shedding its hair-shirt. The euro rose 0.8% against the dollar to stand at $1.2845 while added half as much to by ¥112.95 and has reversed course against today's other winner, the pound.

British pound - Sterling is benefitting from the trajectory of the euro and has surged for a third day against the dollar to $1.5351. The market continues to feel the thaw in respect of the hitherto glacial attitude towards the Eurozone and that's dragging up the pound. The euro turned the tables against the strong pound and now bys 83.68 pence.

Japanese yen - Markets were initially worried by the pace of Chinese slowdown in the Asian session sending stock markets lower. This appears to have morphed into a dollar selling frenzy instead. U.S. equities are not following through on a global implosion and at the time of writing reflect a positive market opening. The yen is pushing higher against the dollar despite the less negative tone to risk and stands at ¥87.93.

Canadian dollar -When risk appetite rebounds it often shows up in the behavior of the commodity dollars. However, there is a creeping sense that the Canadian dollar has built in about as much of the gains that could be expected from a highly probable interest rate increase from the Bank of Canada next week. Nevertheless the dollar-bashing this morning has lifted the loonie from a loss to a 0.5% gain where its stands at 96.98 U.S. cents.

Aussie dollar - The Aussie is also having a hard time in breaching nearby resistance and investors seem to have a more favorable attitude towards European affairs this morning. The Aussie remains lower but only by a slim amount and buys 88.17 U.S. cents today.

Andrew Wilkinson Senior Market Analyst