Dollar Offered

The US dollar is broadly lower against the major foreign currencies. The combination of Fed’s recognition of downside risks to the US economy and inflation coupled with relatively smooth bond auctions from Spain and France helped lift the euro through the $1.28 level. Sterling and the Swiss franc appeared to simply be benefiting from the softer US dollar environment. Sterling was pushed above $1.5350, it best level since late April. The yen is fully participating in the move against the dollar and is holding its own on the crosses. Japanese exporters are believed to have been the main force behind the dollar’s slippage below JPY88.

Near-term sentiment is decidedly dollar negative and dollar bounces will likely to continue to be sold into.

Growth concerns are encouraging profit-taking on the recent stock markets’ advance. The MSCI Asia-Pacific Index fell 1% as all the markets in the region fell, with Thailand being the sole exception. China’s Shanghai Composite was the loss leader, as telecoms, technology and basic materials were the hardest hit. Despite local declines, foreigners were again significant buyers of Korean shares and to a lesser extent Taiwanese shares as well. European bourses are mostly 0.25%-0.75% lower near midday in London. Of note financials are the weakest sector in the Dow Jones Stoxx 600, followed by basic materials. Health care and consumer goods are mitigating the overall decline.

Japanese government bonds staged an impressive rally in response to the US and Chinese growth outlook concerns. The 10-year yield fell 6 bp to 1.07%. The successful reception to the Spanish 15-year bond auction has seen the benchmark 10-year drop 7 bp. Tlka is the foreign investors picked up more than 50%. Other European bond markets are fairly quiet. In terms of policy, Chile’s central bank meets later today and we, alongside others, expect a 50 bp hike in the overnight rate to 1.5%.