The Libor rates will continue to be watched closely in the short term. The decline in 3-month rates to below 0.80% from above 1.00% a month ago is an important sign that dollar supplies in the global market are improving with banks more willing to lend. The crippling dollar shortage was a key factor behind a surging dollar following the Lehman collapse in 2008 and the dollar will find it much more difficult to gain buying support as tensions subside. Unless Libor rates increase again, the underlying rally in higher-risk currencies could be extended for a few more weeks.

The US data on Friday continued to suggest that the economy was stabilising. Industrial production fell by 0.5% in April following a revised 1.7% drop previously which suggested the pace of deterioration was slowing. The New York PMI index also rose to -4.6 in May from -14.6 which was the strongest reading since August 2008 while expectations strengthened further.

The latest capital account data recorded net long-term inflows of US$55.8bn for March following a reading of US$22bn the previous month. The firmness of inflows will tend to underpin dollar sentiment, especially as the trade deficit has been falling strongly over the past few months. There will also be relief that Chinese Treasury holdings held firm during the month.

The latest Libor fixings recorded a drop in 3-month dollar Libor to 0.79% from 0.83% on Friday while the TED and Libor-OIS spreads also continued to narrow.