Dollar Firmer

The US dollar is generally firmer against most of the major and emerging market currencies to start the new week. It has staged a reversal of sorts before the weekend and there has been follow through today. The euro ran out of steam after poking through $1.27.

Support near $1.2550 has been tested in Europe and a break could signal losses toward last week’s low near $1.2480. Weighed down by poor GDP details and dismal current account figures, sterling has broken below $1.50 for the first time since 1 July. Despite poor electoral results for the ruling DPJ, which would seem to weaken the fiscal austerity efforts, the yen is little changed against the dollar, but firmer on the crosses. Short-term momentum indicators warn that it may be difficult to sustain the dollar’s upside momentum in North America today.

Asian shares were mostly higher, but European bourses have struggled to maintain early gains. Declines in Japan and Taiwan offset gains elsewhere and the MSCI Asia-Pacific Index slipped 0.2%. Of note, while the Topix shed 0.4%, the index of bank shares lost 2% today. Rising commodity prices helped the basic materials and oil and gas sectors in the region. The Shanghai Composite continued its recovery, posting gains for the 4th time in 5 sessions, with technology and consumer services leading the way. European bourses are narrowly mixed, though the Spanish market is off around 1.4%. Telecoms, consumer services and financials are suffering the most.

A safe haven bid has returned to the core bond markets, with 10-year German bund yields off 5 bp and US 10-year Treasury yield 3 bp lower. The 10-year yield in Japan fell 3 bp as equity market weakness appeared to offset policy uncertainty after the election results. European supply this week will draw attention. Of note, Greece is trying to sell 1.25 bln euros of 26-week T-bills tomorrow. After a bill auction today, Italy comes to market with 30-year bonds tomorrow and 5-year on Wed. Portugal will sell 1.5 bln euros of 2– and 9-year paper midweek and Spain looks to sell 15 year bonds on Thursday. At the same time, the ECB’s liquidity provisions will be scrutinized after its recent draining operations and firmer money market rates.