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U.S. Dollar Rebounds in European Session

The U.S. dollar eased in Asia Tuesday as a modicum of an appetite for risk returned but the greenback rebounded in the European session. The euro returned to the $1.19 area after being unable to rise above the $1.20 level.

Comments from Fitch that the U.K. fiscal challenge is "formidable" ahead of Chancellor of the Exchequer George Osborne's speech before the House of Commons later Tuesday sent sterling though Monday's lows of about $1.4389. News that Swiss National Bank reserves rose 78.8 billion francs in May, on intervention, seemed to embolden the market as it had managed to absorb the full amount. The euro has been pushed to new lows Tuesday below 1.38 Swiss francs. Meanwhile, the dollar-bloc currencies remain firmer, as do most emerging market currencies.

Asian equities managed to shrug off the 1.3% decline in the S&P 500 Monday with the MSCI Asia-Pacific Index rising 0.3%. Telecoms and materials were the best performing sectors. Initial gains in Europe quickly gave way to fresh selling, with most markets off 1.25% to 1.65% near midday. Telecoms, oil and gas, and financials were the biggest drags, but all sectors were lower.

The Swiss market was holding up better than average, but note that late Monday the lower house of the Swiss parliament rejected the government's plan to modify its banking laws to allow UBS (UBS) to report names to the U.S. to avoid criminal charges, and this appears to be taking a toll on Swiss banks Tuesday, with financials off more than twice the overall market.

The European bond market remains the key focus and spreads over Germany by other countries regarded as core, like France, Belgium and the Netherlands, continue to widen out. The Austrian and Dutch bond sales seemed to have been adequately, if not impressively, absorbed. Italy, Portugal, and Spain will be selling paper this week. It will be the first Spanish auction since the Fitch downgrade. The U.S. Treasury will sell $70 billion in notes and bonds this week beginning Tuesday with $36 billion of three-year notes. The safe-haven demand is likely to offset the low yields to attract buyers.

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