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Firstly there was China's RR cut this morning then along came lunchtime in London and the big news hit: the Fed, the ECB, BOJ, SNB, Bank of Canada and BOE have lowered USD swap rates by 50 basis points effective from December 5th.

Added to this access to dollar swap lines has been extended through to February 1st 2013.This should make it easier for banks, especially in Europe, to access USD funding and has been designed to try and avoid a credit crunch across the world.

So, global central banks are opening the spigots and the casualty has been the dollar. The extension of the dollar swap lines essentially means that dollars will be available cheaply and on request for the next 15 months to Europe's troubled financial sector, which will probably greedily eat them up after being starved of much-needed dollar funding since the summer.

Simple supply and demand dynamics explain the sharp drop in the dollar and the surge in EURUSD to 1.3500 at one stage. This cross has since rested back below yesterday's prior high around 1.3440. This is a major announcement and it should be good for risk on two fronts: firstly, it suggests that central banks are willing to take bold coordinated action to try and stem the Eurozone debt crisis giving markets certainty that the immediate problems caused by the sovereign debt crisis can be dealt with, secondly when the dollar falls risk has tended to rally, and on cue after the announcement commodities including oil and gold have jumped higher.

Swap lines are accessed by banks and financial institutions, so it is no surprise that Europe's banking stocks index has surged 2% on the news. Some of Europe's weakest banks have also seen their stock prices benefit from the news including Societe Generale and Unicredit, which jumped to its highest level in 2-months. This should also be good news for sentiment towards stocks generally.

Added to this, the ADP private sector jobs report from the US extended the joyful mood in the markets, it reported an enormous 206k increase in jobs in the private sector, which suggests that the US labour market is (finally) starting to heal and operate on full throttle again.

Overall, today has been a triple whammy for risk: USD swap lines extension and rate cut, China RRR cut and the massive ADP jobs number. The world is rosy again and risk is rallying with abandon. But the EU finance ministers' meeting has the potential to scupper things.

So although light is now getting through we are not out of the woods yet. Essentially USD swap lines are a short term liquidity measure we need long-term actions from Europe's leaders to guarantee greater fiscal unity, give us Eurobonds and allow the ECB to take up the role of lender of last resort before this crisis is really over. But for now, risk likes what it hears and is happy with short-term action.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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