Dollar Reverses Lower, but Consolidative Session Likely

The US dollar initially extended yesterday’s recovery, but reverse lower in Europe, despite elevated tensions in the periphery of Europe.

Optimistic comments by ECB’s Stark, seeming to signal another step on the exit strategy, German industry association seeing no threat in the current euro level may have helped fuel the euro’s recovery from the test on $1.3380 support.

The dollar-yen remains sidelined---confined to a 20 tick range. Sterling is the best performing of the majors, with the apparent help of month end flows, positive M&A talk and although Q2 GDP was confirmed at 1.2%, business investment was stronger and the current account deficit somewhat smaller than expected (though revisions were poor) and CBI Distributive Trades report was well above expectations (49 vs consensus 25 and 35 in Aug) Sterling price action is impressive, as it fell through yesterday’s lows and now has traded above yesterday’s highs—to set a new seven week high--. Despite the dollar’s sudden decline in the European morning, look for a consolidative tone in North America today.

Spain's bill auction was mixed. Yields rose about 6 bp for the 3 month bill and produced a higher bid cover, but the 6-month bill yield rose 14-15 bp and the bid to cover fell. Irish and Portugal bonds remain under the most pressure.