Dollar Down as Risk Appetite Increases

NEW YORK ( BBH FX Strategy) -- Global stocks are mostly higher in part following a strong close on Wall Street after some better-than-expected earnings results and encouraging signs that Europe is working towards a bold policy solution.

Asian stocks were boosted in part from the large increase in the foreign exchange swaps deal between Japan and South Korea, which is also expected to address yen funding concerns.

As a result, risk appetite has improved and the dollar is declining against nearly all of the G10 and emerging markets currencies, although the BRL is flat ahead of today's central bank meeting.

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Meanwhile, sterling dipped after the Bank of England minutes showed a unanimous vote on QE and some even called for bigger stimulus. Also, Japan's August indices of all industrial activity fell 0.5%, the first drop in five months. Elsewhere, the Bank of Thailand kept its policy rate on hold at 3.5%. Oil is up 0.3%.

Today markets are encouraged by reports that European leaders are considering boosting the European Financial Stability Facility by upwards of 2 trillion euros. That helped investors shrug off the news that Spain was downgraded by Moody's two notches to A1.

However, we suspect an early comprehensive solution is unlikely at this juncture and in fact European press reports have already tried to downplay expectations, suggesting that the limit for leveraging the EFSF will be 1 trillion euros and ultimately will be based on an insurance model that has not yet been finalized.

We expect the EUR/USD to remain short of Monday's highs ahead of the Greek austerity vote Thursday and equally important ahead of this weekend's Economic and Financial Affairs summit. The 38.2% retracement comes in near $1.3620. A break of that would suggest $1.3530 to $1.3550.

The Bank of Japan expanded the JPY/KRW bilateral swap line to $30 billion, established a new one-year USD/KRW line worth $30 billion, and provided Korea with another $10 billion under the multilateral swap agreement, called the Chiang Mai Initiative, between ASEAN countries. The new funds provide an extra liquidity buffer for Korean companies and banks that have large foreign debt liabilities.

As a result, the move strengthens our positive relative value view toward KRW against most other regional currencies and should also be supportive of Korean assets in general as it further reduces the risk of another funding squeeze.
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.