Dollar Falls As Risk Appetite Remains Strong

The dollar fell on Wednesday after risk appetite remained strong. A fall in demand for German and British bonds – widely seen as safe-haven assets - was viewed as a positive reflection of investor sentiment ahead of the ECB meeting at which more action is expected. Wednesday's data releases were of minor importance with MBA Mortgage Applications (Aug 31) easing by -2.5% from -4.3% previously; Non-Farm Productivity (2Q) rising to 2.2% vs 1.8% expected; Unit Labour Costs falling from 1.7% to 1.5% when a deeper fall to 1.4% was forecast and ISM New York (Aug) falling to 51.4 from 55.2 previous. Thursday's data will concentrate heavily on Employment, with ADP Employment Change expecting to show a fall to 140k from 163k previous, and this could cause volatility given the stress placed on jobs by Bernanke in his Jackson Hole address.

EUR
The euro rose overall on a volatile day. There was a lack of demand for 10-year German bonds and 30-year U.K bonds at auction, the former selling only 3.6bn when 5.0bn had been the target and the latter showing a bid-to-cover of 1.52 vs 2.22 at a previous similar sale. The poor results led to a rise in risk appetite and supported the euro because it was interpreted as reflecting confidence in ECB policies.

Further details of the ECB's bond-purchase plan were released, with the central bank planning to buy short-dated government debt only, with unlimited scope, subject to strict borrowing conditions which nations must adhere to and with the Bundesbank the only dissenter. Data out showed Retail Sales fell in line with expectations by 1.7% yoy and 0,2% mom; Composite PMI fell to 46.3 vs 46.6 expected and Services to 47.2 from 47.5.

GBP
The pound strengthened on Wednesday piggybacking the euro as it rallied higher following reports revealing more detail about the ECB's proposed bond-purchase programme, which heightened speculation it could be ready to unveil at tomorrow's rate meeting. Last night's British Retail Consortium's Price Index for August provided the only data release and although it showed a rise to 1.10% from 1.00% in the previous year had little impact.

The BOE is also scheduled to hold its rate meeting tomorrow however no change in policy is expected. The pound's fluctuations will probably remain correlated with the single currency as the continent is still the U.K's largest trading partner and decisions there influence sterling. Conversely, the pound could also benefit were the euro to fall, garnering safe-haven bids from its neighbour's demise.

JPY
The yen weakened after a rise in risk appetite fed by ECB hopes quashed safe-haven demand. The main economic news was a speech by a BOJ board member Ryuzo Miyao. The central bank official was downbeat in his commentary saying there was an “increasing risk that overseas economic recovery will be delayed.” He noted that the pace of U.S recovery was slowing and Asian economies were being affected by the drop in exports to Europe.

He was optimistic China could continue to promote growth globally although he was less optimistic about Japan where despite a steady recovery “worry factors are increasing.” Miyao restated the BOJ's commitment to using monetary easing to stimulate growth and combat deflation and it is now expected to announce more easing at the rate-meeting in October.