Dollar Retreats Mildly as Risk Aversion Recedes

Dollar is mildly softer today as risk aversion recedes on solid data from US overnight. Asian equities are genearlly higher following the mild 45pts recovery in DOW. Fitch downgraded some of the world's largest banks on increasing challenges in the financial markets but the news was ignored. Barclays and Credit Suisse were cut by tow notches to A, while BofA, BNP Paribas, Citigroup, Deusche Bank and Goldman Sachs were cut by one notch. EUR/USD is back above 1.3 psychological level and would likely consolidate above recent low of 1.2946 for a short while.

IMF Managing Director Lagarde warned that Europe's problem could not be solved by Europe alone and urged support from "all countires, all regions". She said that the global economy could risk going into Great Depression of the 1930s if the issues are not dealt with decisively. Lagarde said work should target from "the core of the crisis at the moment", ie, Europan and "in particular the countries of the eurozone". Meanwhile, Lagarde said internation support could be channeled through IMF for “organizing a collective financial responsibility, a fiscal solidarity and that element of risk-sharing that is expected, pretty much, around the globe."

New York Fed Dudley said in his tesimony to Congress the dollar swap lines with other major central banks protect the US economy from big dollar assets selloff. He warned that "if the access to dollar funding were severely impaired, this would necessitate the abrupt forced sales of dollar assets by these banks, which could seriously disrupt U.S. markets and adversely affect U.S. businesses, consumers and jobs." Dudley noted htat US banks are deeply entwined with the EUropean banking system and if the European debt crisis were to "broaden further and intensify, this could put greater pressure on U.S. banks' capital and liquidity buffers."

Italy will be a major focus today as Prime Minister Monti will face a confidence vote on the move too spped up approvide of the EUR 33b austerity packge. The technocrats govenrmnet has overwhelming majority in both houses of paarliment and should pass easily today's vote in Chamber of Deputies and Senate before Christmas.

On the data front, Eurozone trade surplus is expected to narrow to EUR 1.3b in October. Canadian internaltion securities transactions are expected to rise to CAD 8.23b in October. From US, main focus will be on inflation data and CPI and core CPI are expected to be unchanged at 3.5% yoy and 2.1% yoy respectively.