Dollar Extends Last Week's Losses

The US dollar is extending last week’s pullback in what appears to be largely position adjustments, partly as a function of a better news stream and a healthier appetite for risk. For the first time since mid-April, the euro has traded above its 20-day moving average and sterling has completely recouped the losses seen in response to the unexpected weakness in April manufacturing output reported before the weekend.

The greenback’s losses are widespread, with the emerging market currencies also fully participating. The main exception is the Japanese yen, which is under pressure especially on the crosses. The dollar lost nearly 2% against the Korean won as the new regulations were in line with guidance and domestic and foreign banks were given time to adjust.

Global equity markets are broadly higher. The MSCI Asia-Pacific Index gapped higher for the second consecutive session to rise about 1.6% on the day and to trade at its best level since May 20th. China and Australian markets were on holiday. The Nikkei was the regional leader with a 1.8% rally, led by consumer services and services, and industrials. Rising commodity prices also boost the basic material sector in the region. Progress on China-Taiwan trade deal encouraged foreign buying of Taiwanese shares for the third consecutive session. European bourses are following suit. The Dow Jones Stoxx 600 is advancing by more than 1%, led by basic materials, industrials and financials.

Sovereign bond markets are under pressure as the safe-haven bid evaporates. Ten-year yields in Europe are mostly 5-7 bp higher with a couple notable exceptions. Political uncertainty in Belgium following the weekend election and anticipation that it may take some time to cobble together a coalition have seen Belgian bonds under perform, with 10-year yields rising 11 bp. UK gilts are among the region’s better performers today, perhaps helped by government’s Office for Budget Responsibility suggesting a GBP22 bln smaller deficit in the 2010-2015 period than the Treasury Dept projected. Lastly, Fitch revised its outlook for India’s local currency debt to stable from negative.