The U.S. dollar was little changed against most of the European currencies and within the dollar-bloc as a consolidative phase is emerging. The yen is center stage Wednesday following the resignation of Japan's prime minister.

The political uncertainty and calmer capital markets have seen the greenback extend its recovery against the yen to about 3% off the May 20 low near 89 yen. Resistance in the 92-92.30 yen area is being flirted with just prior to the start of the North American session. Sterling is also a standout as its recent gains are extended. Unwinding Prudential ( PUK)/ AIA (the AIG ( AIG) unit ) related positions/hedges and flows out the eurozone are the key talking points. Since its recent low, sterling has advanced about 3.8%.

In consolidative/risk-on phases, we think attractive tactical opportunities exist in the dollar-bloc. We also like Sweden (though it is near the year's highs against the euro), as the Riksbank is among the leading candidates for a rate hike in the early second half of the year.

The greater stability in the foreign exchange market does not mean global equities are higher. To the contrary, Asian and European equities are lower. The MSCI Asian-Pacific Index shed 1.1%, weighed down by industrials and commodity sectors. The Nikkei fell from the get-go and extended the losses following the political developments, but stabilized to close off 1.1%. In contrast, the Shanghai market opened lower and recovered steadily to eke out a 0.1% rise. European bourses were nursing around a 1% decline near midday, paring back steeper initial losses. Health care appears to be faring the best. Oil, gas, utilities, and financials are dragging up the rear.

Sovereign bond markets were generally quiet, but there are a few notes. First, Italian and Spanish bonds are underperforming, with 10-year yields rising six to seven compared with a one basis point increase in Portugal. Second, Thailand, as expected, left rates steady at 1.25%. Third, Chinese money market rates continue to rise, with the seven-day repo rate rising to 3.28%, the highest since October 2008, following the first increase in the one-year bill rate in four months. The PBOC has been draining liquidity and the large bank convertible bond sale appears to be exacerbating conditions. The 12-month non-deliverable forward for the yuan continues to trend lower and is now near 0.7%.
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