Fear of sovereign default in the Middle East rattled the markets this morning following yesterday's news that the state controlled Dubai World announced it intended to ask all bondholders for a postponement of repayments until May.  Stocks markets sank across Asia and the Europe.  Following sharp moves for the USD during Asian hours there is evidence of paring back of risk on some fx crosses this morning, though on the view that the US authorities are unconcerned about USD weakness EUR/USD remains above the 1.5000 level, USD/JPY remains below 87.20 and USD/CHF is holding close to parity.  

Last night's break through parity on USD/CHF took out a major psychological USD support.  A break of the USD/JPY 87.20 level followed overnight triggering a fall in the USD vs the JPY to 14 year lows at 86.30.  The move forced Finance Minister Fujii to remark that the government is watching currencies very closely.  In the past this gov't has not shown much concern over JPY strength.  However, insofar as the government has now admitted that economy is suffering deflation and given that the Nikkei 225 has been trending lower over the last month, the market has been forced to pay some heed to today's veiled threats of intervention.  Not helping the position of the JPY is the sidestepping by China over its effective USD peg.  A revalued CNY would re-direct some of the pressure of USD weakness away from the JPY and the EUR.  Eurozone officials are soon to visit China.  Once again the world will be watching to see if China makes some effort to shift its exchange rate higher vs the weak USD.  However, evidence to date suggests that China is waiting for a strengthening in external demand before taken such a move.  This would leave the ball firmly in the court of Japanese and European officials.  While intervention vs the USD is a possibility, the success of such a policy would be doubtful in an environment when the Fed has promised low rates for an extended period, so for now Japanese officials, like their Eurozone counterparts, are likely to stick with jawboning in an effort to slow the USD's fall.  USD/JPY is presently trading off its lows at 86.60 but has yet failed to launch a convincingly bounce from the lows.  

The fall below USD/CHF 1.000 overnight forced the CHF to stronger levels vs the EUR.  The drop to EUR/CHF 1.5020 seemed to be sufficient to draw the SNB back into the market.  From a trade perspective EUR/CHF is far more important to the Swiss economy than USD/CHF.  

Sharp moves lower in GBP/JPY and AUD/JPY distorted the moves in cable and AUD/USD this morning.   Sterling and the AUD both fell sharply vs the USD, with AUD/USD finding support at 0.91600 and cable dropping back to an intraday low of 1.6504 in thinned activity ahead of the US Thanksgiving holiday.  

Soft Eurozone M3 data (+0.3% y/y in Oct) serve as a reminder that very weak monetary policy is still feeding through into the real economy in a lacklustre manner.  This suggests weak consumer potential into 2010.  US markets are closed today.
Jane Foley