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Dollar Lower as Risk-Taking Returns

The U.S. dollar was broadly lower to start September as stronger data, especially from Australia and China, encouraged new risk-taking. Yet this hasn't seen the yen and Swiss franc, beneficiaries of risk aversion, lose ground Wednesday against the greenback though they are underperforming on the crosses.

This, coupled with the fact that some countries like the U.K., Norway and Sweden, which have reported disappointing PMIs, have also seen their currencies rise against the dollar Wednesday provides a sense that in addition to the risk-on story there is a weak dollar bias. Given the over-stretched short-term technical studies, the risk is that if the U.S. data disappoints Wednesday, the price action could be reversed.

Global equities were rallying as the new month gets underway. The commodity sector helped lead the MSCI Asia-Pacific Index's 1.1% advance. Stronger-than-expected Australian second-quarter gross domestic product (1.2% vs 0.9% consensus) helped lift the S&P/ASX 200 by a bit more than 2%. News that continued growth in Korea's exports saw the Kospi rise 1.25%, and the helped lift the won by a sharp 1.2% against the dollar.

European bourses also were fully participating in the rally with most major indices up 1%-1.5% near midday in London. Basic materials and consumer services and goods were leading the way, but all major sectors were advancing. U.S. indices were called a bit more than 1% higher, though the ADP jobs data will be out before the open of the New York Stock Exchange.

The general increase in the risk appetite is also being reflected in the sovereign bond markets. Bond yields are mostly 4-6 basis points higher in core Europe. This includes the U.K. and Sweden where the PMI was considerably weaker than expected. Peripheral bonds were outperforming the core resulting in a modest narrowing of spreads, a little less in Ireland and Portugal and a little more in Italy and Spain.

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