Overnight comments in Asia from two Fed officials served to expand upon Monday's keynote speech at the Economic Club of New York in which chairman Bernanke discussed the falling dollar. Dallas Fed president, Richard Fisher noted that the value of the dollar was but one of the inputs when setting policy and that a gradual decline was not likely to lead to inflationary pressures. His fear for a sub-3% growth rate next year was compounded by a more optimistic OECD assessment for global growth, but one that only raised U.S. GDP for 2010 to 2.5%. Risk aversion is taking root once again today and is being played out in firming dollar and yen prices.

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It has to be said that it is neither the ambivalence of either of the Fed speakers nor is it the prospect of firmer growth from the OECD that have boosted the value of the dollar overnight. Rather a 1.3% slide in Japan's Nikkei Dow index overnight appears to be weighing on sentiment. The Hang Seng in Hong Kong was also down by 0.9%.

Negative sentiment seems to have sparked selling following an earlier in the week announcement from Mitsubishi UFJ that it would raise $11.2 billion through the sale of additional stock. Banking shares are looking less attractive as capital adequacy requirements prove more onerous. The pessimistic tone to Asian financial companies and a warning over the health of the British banking sector today confirms the negative tone and is dollar and yen supportive.

The dollar rose to $1.4850 per euro ahead of the Conference Board's leading indicator report, which should continue to point to economic growth six months forward. Meanwhile the Philadelphia Fed will also report on the state of the local manufacturing sector and we expect to see a fourth straight monthly expansion.

Philly Fed chairman, Charles Plosser spoke to journalists after a speech in Singapore and sounded sanguine over the dollar's position. His comments reflected surprise at the dollar's current value and said that there was no reason to expect the dollar to not revert to its pre-crisis state, and since that's precisely where we are, why the panic? He makes a good point we feel and so long as there is no blood on the streets - as was the case when equity prices sagged throughout the crisis - then we should expect an orderly decline.

The dollar index is up by 0.4% at 8am ET with S&P 500 index futures showing a pre-market buckling for stocks of 9.25 points in early trade.

The British pound is off by a penny against the dollar at $1.6644 and is little changed per euro at 89.30 pennies after an executive at Experian Plc, the world's largest credit-checking company said he doubted that credit write downs at banks had peaked and that the state of Britain's banks was the worst anywhere in the world.

The Japanese yen was strong across the board as the latest bout of risk aversion swept the globe. It gained against the dollar, which today buys fewer yen at ¥88.88 and its rise to ¥132.11 makes for its strongest performance in two weeks.

The leader of European area finance officials, Jean Claude Juncker attempted to remove discussion of 2010 stimulus removal from the table today. He noted that to do so would weaken the economy and could have negative consequences. While this underscores the less than robust nature of Eurozone recovery there is also the added threat of euro strength to consider looking ahead.

In addition an OECD report today predicts that both the Fed and the ECB will leave monetary policy alone through the end of 2010. Over the course of the next year it predicts that the Fed will recapture a yield advantage by raising rates more aggressively from zero to 2.5% while the ECB doubles its short rate to 2%. While it's still too early to state definitively that today's forex action is shaped by such distant notions we can say that over time such expectations are factored into traders' expectations.

Like other commentators bearish of the dollar, we admit to being slightly disappointed by the euro's failure to rally above $1.50 in the present climate, but we do see it as premature to throw in the towel on the longer term decline in the dollar. That's more than likely a story for 2010.

Feeling the cold shoulder today are the commodity dollars, which shouldn't come as any surprise given risk aversion. The Aussie dollar still seems to be suffering from dwindling expectations for a December rate rise following sanguine wage growth data. In early New York trade the Aussie is quoted at 91.77 U.S. cents. Meanwhile Canada's dollar is quoted at 94.17 U.S. cents.

Andrew Wilkinson

Senior Market Analyst