While the pressure this week has been put squarely on the ECB to step up its role in order to help solve the euro zone sovereign debt crisis by perhaps becoming a lender of last resort today we saw the ECB president Mario Draghi is calling on governments to implement the European financial stability facilities capability to help the secondary periphery bond market.


From Financial Times: In an uncompromising message, the new ECB president said robust economic governance of the eurozone was essential for financial stability and criticised the delay in deploying the European Union's bail-out fund, the European Financial Stability Facility - originally launched 18 months ago.

Mr Draghi's comments highlighted how the ECB sees its contribution as strictly limited - and the initiative lying with governments. Although, traders have reported that the ECB has stepped up its intervention in bond markets this week, Mr Draghi has ruled out the central bank becoming lender of last resort to governments.'

Despite the tough talk by the new ECB president we do see the euro climbing in today's session. The question is whether this is a Friday short squeeze or if some new developments have boosted market sentiment. The move higher came despite both Asian and European stock markets being lower, though we do see European indexes trying to recover earlier losses.

Part of the jump was attributed to the idea that the ECB may be considering lending to the IMF so that it could provide lines of credit to struggling sovereigns currently under attack.

The US dollar was weaker across the board following the European session. European periphery yields fell during the European session an indication that this stepped-up ECB involvement in the secondary bond market continued.

The spread between Italy's and German 10-year yields, which climbed above 5% earlier in the session was down to 4.8% prior to the New York open. The spread between Spain's 10-year and German 10-year edged above the 5% level before being brought down to 4.87%. When the spread between Spain and Germany reaches 500 basis points that is likely the time when clearinghouses world raise margin requirements to trade Spanish debt which could cause another bout of strong risk aversion in the markets.

Aggressive buying in the Italian and Spanish periphery bond markets is likely the reason the euro has managed to stage a strong rally in today session while under the cover of the ECB's tough words.

From Bloomberg: The euro is still very vulnerable but one factor that has been supportive this week has been that every day when the ECB has come in and bought stressed debt, the euro has reacted favorably, said Jane Foley, a senior currency strategist at Rabobank International in London. There's this psychology going on surrounding what the ECB might do, which is giving the euro some support.

Dudley Plays Up More Asset Purchases

width=400The dollar meanwhile maybe being pressured by its own factors considering one of the most influential FOMC members the New York feds Bill Dudley said yesterday that the Fed could step up its purchase of longer-term financial assets.

From Bloomberg: I am deeply unhappy with the current forecast of prolonged high unemployment, and will continue to review whether there is more that we could do that would bring more benefit than cost, he said. If additional asset purchases were deemed appropriate, it might make sense to do much of this in the mortgage-backed securities market.

With concerns that the super committee will not meet its deadline and the US will face further political gridlock will likely weigh on the dollar the rest of the month.

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, AnalysisEducationVideosCharts, and other trading resources.