Dollar Pares Back Gains as Euro Stocks Rise

NEW YORK ( BBH FX Strategy) -- The dollar is paring back some of its recent gains in part as European stocks and growth-sensitive currencies rise amid signs that G20 policy makers are working on a solution for the eurozone debt crisis. In fact, the dollar ran into ran into selling pressure in Asia after USD-SGD fell sharply following the Monetary Authority of Singapore's decision to ease policy less aggressively than the market had expected.

China's easier CPI release raised discussion that the People's Bank of China could have room to ease into year-end, though we suspect given the elevated level of inflation it is more likely to ease bank RRR rather than cut the interest rate.

This backdrop helped the market overcome news of ratings downgrades of Spain and a slew of European banks, and general ongoing concerns about the banking sector. The EuroStoxx 600 is up 0.8%, although bank shares are flat. Peripheral spreads are under pressure ahead of Italy's second vote of no confidence in a month this morning, while the final eurozone Harmonized Index of Consumer Prices was confirmed at 3.0% year over year.

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Ahead of the weekend risk appetite appears to be gaining momentum again. Reports from the G20 meeting indicate that the International Monetary Fund is considering a plan to make short-term credit lines available to fundamentally sound countries, along with discussions about developing nations raising their funding contributions to the IMF. In theory, this could be used to increase global lending capacity to Europe. These are important steps to help shore up some of Europe's banking ills but in our view for now these are just discussions, which are unlikely to be announced or acted on until the official summit on 11/3.

That means, while the headline news is likely to be supportive of risk appetite in general we doubt this is likely to be enough for the EUR-USD to make a convincing break of the recent highs, given the lack of consensus between various groups and the outstanding political risks that loom.

In the emerging markets space China CPI slowed to a 6.1% y/y rate in September from the 6.2% year-over-year clip in August, as inflation growth further slowed from the recent peak rate of 6.5% year over year in July. PPI growth moderated to 6.5% year over year in September from 7.3% in August and a peak 7.5% in July. The further slowing in the pace of inflation growth was largely expected, and should allow for a pause in tightening from the central bank amid ongoing uncertainty over the global outlook.

Elsewhere, Singapore GDP rose 5.9% in the third quarter compared to the same quarter in 2010, a pick-up from the 1.0% rate in Q2. GDP rose 1.3% quarter over quarter. Subsequently, the MAS decided to maintain a policy of modest, gradual appreciation of the SGD, leading to the SGD to outperform the rest of the Asian currencies in the overnight session.
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