The emphasis for yesterday's trading clearly shifted back to risk-sentiment from interest rate speculation, and the US Dollar benefited across the board. Investors used the excuse of concerns about rising sovereign debt troubles to take profits on risky positions ahead of the year end. Fitch downgraded Greece's debt rating while Dubai and other government debt worries escalated. Moody's cut the ratings of six Dubai-linked issuers after concluding that no meaningful government support would be provided to top firms like DP World. Also, U.S. stocks fell after disappointing corporate news from 3M Co and McDonald's. This news raised some doubts about consumer spending, a key requirement for the recovery to take place. The Dow Jones lost over 100 points. British and European shares closed as much as 1.7 percent down due to bank fears of over risk-exposure to Dubai.

As we have seen again and again, when risk sentiment is driving the FX markets, and when the sentiment is risk-aversion, traders pile into safe-haven currencies like the US dollar and the Japanese Yen. The euro fell to a one-month low of $1.4665 against the dollar from a daily high of $1.4862, the lowest it has fallen since early November. The Eurodollar traded flat during most of the night but has staged a mild rebound in early morning trading. It is hovering at around the $1.4730 level at the time of this writing.



Meanwhile, the Sterling was down 0.3 percent to $1.6237, after falling to an eight-week low of $1.6224. It has managed to crawl back to $1.6259 at the time of this writing. Worries about Britain's fiscal health continued to pressure the UK currency. Soft economic data, a major fall in the value of Royal Bank of Scotland's shares, and worries about the state of Britain's public finances and debt rating have all played a part. Yesterday, England reported mixed economic data, with monthly housing starts coming in better-than expected but monthly manufacturing production worse-than-expected.


The Yen rose along with the dollar during yesterday's flight to safety, regardless of the fact that its economic situation remains quite grim. The Japanese government agreed on a $81 billion stimulus package aimed at preventing the economy from slipping back into recession. Deflationary worries are mounting, and the strong yen is undermining the country's export business. Japan's gross domestic product grew a revised 0.3 percent (reported last night) in Q3 from the previous quarter, against forecasts for a 0.7 percent expansion. The Nikkei lost 1 percent. Nevertheless, the JPY advanced for a second day versus the USD to around 88.35 yesterday and has remained firm this morning. There is indication that support exists for the pair at 87.80Y, while resistance is expected at around the 88.80Y mark.



Oil prices fell more than $1 to below $73 a barrel yesterday, extending losses to a fifth straight session as the dollar strengthened and demand concerns continued. There was a downward revision to the U.S. government's forecast for 2010 global oil demand growth. Oil markets have been looking to wider economic data and equity markets this year for a sign of a turnaround in the economy that could boost crude demand and lower inventory levels. U.S. January crude futures have fallen $5.75, or 7.3 percent, since prices last rose on Dec. 1. However, U.S. crude futures rose back above $73 a barrel early this morning after industry data showed a surprise draw-down in U.S. crude inventories.



Gold remained pressured yesterday as the dollar rose. The metal fell to as low as $1,124 per ounce, the lowest since November 16. The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings fell to 1,116.247 tons as of Dec. 8, down 1.2 percent from the previous business day. It was the largest one-day drop in about five months. During late night and early morning trading, gold has rebounded modestly to about $1,135 at the time of this writing.


In the opinion of this author, profit-taking has been the main factor behind the dollar's recent rise. If risk-sentiment was so influential, why did traders jump out of riskier assets and into the dollar after Friday's impressive US jobs numbers? It seems that investors are looking for reasons to unwind profits from higher-yielding assets, especially since we are nearing year-end. This leads one to think that this dollar rally may prove unable to extend into 2010, given the relatively unfavorable economic situation that the US is facing.

Expect the FX market to get most of its cues from the equity markets and other global news today.

News coming up today:

It is a very light day on the economic news front today, with highlights being US crude oil inventories and the New Zealand interest rate decision.

UK Trade Balance: 9:30 GMT

US Crude Oil Inventories: 15:30 GMT

NZ Interest Rate Decision and Press Conference: 18:00 GMT