Dollar Moves Higher as Risk Rally Fades

NEW YORK ( BBH FX Strategy) -- The dollar moved broadly higher, paring back some of its recent losses after the recent risk rally ran out of steam ahead of key technical levels. Asian stocks follow the trend put in place on the Wall Street, rising for a sixth day amid hopes that European leaders are inching closer toward a plan to tame the sovereign debt crisis, while shrugging off Chinese data that showed a modest pullback in China's export growth.

The MSCI Asia Pacific Index surged 1.2%, but gains were unable to be sustained in the European session and stocks fell back from a two-month high. Nevertheless, the pullback in the VIX to 30 from levels near 50 in August underpins the improved tone. Just-released better-than-expected bank earnings are boosting S&P futures ahead of the open. Oil prices down nearly 2.0%.

The dollar's broad-based losses appear to have reached a natural pause after the recent short-covering rally ran its course and currencies, equities and bonds ran up against key resistance levels. As of Wednesday, nearly all G10 currencies, along with the S&P 500, having retraced almost exactly 50% of the decline from early September, appear to have run out of steam for the moment.

Broad-based measures of market stress appear to be consolidating amid the combination of the macro data and movement toward a bold response from European policy makers. For the market to maintain this reversal we need to receive further confirmation that the macro data remains on track, financial conditions continue to improve and banking sector stress conditions to mitigate. While the European situation looks more positive, concrete action to shore up the financial system has yet to be taken. That means the EUR/USD is best sold into rallies between 1.384-1.400.

Follow TheStreet on Twitter and become a fan on Facebook.

In the Asia emerging markets space South Korea's central bank held rates steady, leaving the seven-day repurchase agreement rate at 3.25% to match expectations. This marks the fourth consecutive month that the Bank of Korea has held rates steady and led to the KRW outperformance in the Asian session, which advanced by nearly 1%.

Elsewhere, China's exports rose 17.1% in September compared to the same month last year. That is moderation from the 24.5% year-over-year pace in August and the slowest growth rate since the 2.4% year-over-year clip in February of this year.

In Latin America, after Mexico's dismal August industrial production, we believe it is likely that Mexico could cut rates. We believe it is not a done deal but the OIS market places a greater than 80% chance that the policy rate drops by 25 basis points to 4.25%, in spite of the fact that inflation remains close to the 3% target. The main driver, on balance, appears to be the slowdown in the global economy, U.S. in particular, with Mexico's exports to the US accounting for nearly 73% of its total.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.