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• US Dollar Weighed by Investor Risk Taking, World Bank Seeing Viable Alternatives for a Reserve Currency
• Euro Strength Dampened as the Outlook for ECB Rate Hikes Dim
• Japanese Yen Extremely Volatile as Finance Minister's Stance on Intervention Unclear
• Australian and Canadian Dollars Supported by Central Bank Governors' Outlooks

US Dollar Weighed by Investor Risk Taking, World Bank Seeing Viable Alternatives for a Reserve Currency
The US dollar pulled back from its early morning highs Monday partly due to a shift in risk trends; but compared to the Japanese yen, the currency was unmistakably bullish. For the trade-weighted dollar index, the day closed in the green and the session high probed levels not seen since October ninth. Amongst the various pairs, the price action was more prominent. EURUSD extended its reversal pattern by temporarily dipping below 1.46. Against the yen, the dollar recovered more than 130 points after plumbing an eight-month low, while the sterling pair pushed closed in the red for the fourth consecutive trading session - bringing the total peak-to-trough drive over this period to just under 700 points.

While there were some considerable moves across the majors; most of the impetus for these drives came from the greenbacks counterparts. From a fundamental standpoint, the dollar was relatively balanced for the day. However, this in itself is a feat considering the healthy surge in risk appetite through the US session. Using equities as the unofficial barometer for investor sentiment, the benchmark S&P 500 rallied an impressive 1.78 percent for Monday - the biggest move in some five weeks. What has this strength been attributed to? Merger and acquisition activity that further supports the notion that conditions are returning to normal. However, qualifications for a true recovery in optimism should be reserved until liquidity fills out and meaningful fundamentals cross the wires. From the US docket, only the Chicago Fed National Activity Index and Dallas Fed Manufacturing Activity report would cross the wires. Neither is known for being a notable market mover; but the reading from the Federal Reserve Bank of Chicago is meaningful as a national gauge. This indicator is loosely used as a gauge of economic activity and inflation pressures; and a reading below zero is considered a sign of below trend growth and tempered price levels. The August measure unexpectedly deteriorated from its 18-month high with a negative 0.90 reading. Of 85 individual indicators that make up the index, 54 made negative contributions. Anecdotally, this indicator reflects the general concern surrounding the US economy - that a recovery from the worst recession since the WWII is underway; but expansion beyond the revival will likely be measured and choppy.

In other news, big names outside of the United States made comments on the dollar. ECB President Jean-Claude Trichet said in a speech to EU lawmakers today that a strong dollar was very important for the stability of the global economy. In contrast, World Bank President Zoellick warned that the US would be mistaken to take for grained the dollar's place as the world's predominant reserve currency as there may be more viable options to the dollar in the future. He further suggested the euro was a ‘respectable' alternative to the dollar for financing. A frank assessment of these warnings is that they are not altogether shocking and neither do they call for immediate action; so their impact is altogether limited. Looking ahead to tomorrow, regularly scheduled event risk may once again have sway over price action. The Conference Board's Consumer Confidence survey for September is due at 10:00 EST; and the projected one-year high furthers recovery expectations.

Related Article: Optimistic Economic Outlooks to Meet Hard Facts This Week, How Will Consumer Confidence Influence the US Dollar?

Euro Strength Dampened as the Outlook for ECB Rate Hikes Dim

The euro was down across the board Monday as German inflation and commentary from ECB President Trichet pushed back the time frame for forthcoming rate hikes. Just a few months ago, the swaps market was pricing in an imminent rate hike (or measured series of hikes) from the European Central Bank. However, since then the policy authority has done an extraordinary job of moderating such hawkish speculation. This morning, in his statement to the European Parliament, Trichet repeated many of the sentiments he has stated in the past to an overall dovish effect. For growth, he said the situation has improved since March but that the outlook is ‘surrounded by uncertainty' and the eventual recovery will come at a very gradual pace. He went on to say that the benchmark rate is appropriate; and while the ECB did have an exit strategy, it would not be put into effect until price risks emerge. With that in mind, the preliminary September German consumer inflation data released today has pushed a potential rate hike even further back. A 0.4 percent contraction through the year (on an EU harmonized basis) was weaker than expected and extended the measure's first jaunt into negative price growth in 22 years to a third month.

Japanese Yen Extremely Volatile as Finance Minister's Stance on Intervention Unclear
In an already active session, no currency was as volatile as the Japanese yen. Initially, the currency opened the week by extended its aggressive rally; but a very early session reversal helped to retrace nearly all of the session's gains. Data was light; so fundamental traders would have to once again settle for commentary from the very vocal Finance Minister Hirohisa Fujii. Just two weeks ago, the new policy authority shook the market up when he said that he did not see intervention on behalf of the yen as a reasonable policy approach. However, since then, he has flip flopped on the issue and thoroughly blurred hope that the yen could appreciate unfettered should fundamentals (or risk flows) warrant it. Adding to the running tally on his standings, Fujii said this morning he never said I will leave the yen to strengthen. He further noted that the exchange rate has been somewhat one-sided recently; setting up a full reversal on his position as the ruling Democratic Party of Japan comes under pressure from its export-based constituents.

Australian and Canadian Dollars Supported by Central Bank Governors' Outlooks
Policy officials in the Australian and Canadian economies added to the rate speculation Monday; but their efforts to keep exceedingly caution may be betraying a strengthening bias. Reserve Bank of Australia Governor Glenn Stevens was more blatant in his bullish stance this morning. Stevens said in his testimony before a Senate Committee in Sydney that the economy is in recovery and that the bank had already signaled that interest rates can be expected, at some point, to move off their current unusually low levels. Much later in the day, Bank of Canada Governor Mark Carney warned once again that the persistent strength in the currency could counteract growth and inflation in the economy. Yet, once again he maintained flexibility with monetary policy considering inflation as growth in 2H would likely be stronger than forecast.

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Written by: John Kicklighter, Currency Strategist for