Dollar Falls Monday On Continued Speculation Of Central Bank Easing

The dollar fell on Monday following continued speculation of central bank easing globally and a particularly strong Manufacturing PMI in the U.K which also helped boost risk appetite. There was no data out directly for the dollar, but against the euro it fell as excitement over the ECB's proposed bond-buying plan continued to help support the single currency, despite steadily worsening fundamentals.

It's really not until Wednesday when we might see some volatility as a result of economic data, when the ADP Employment Change is released and its impact on a highly employment-sensitive, post-Jackson Hole monetary policy expectations. Then on Friday we get nonfarm payrolls which could make or break QE3 expectations.

EUR
The euro rose on Monday as expectations remained high that the ECB would use its bond-buying programme to stabilize markets. Excitement at the possibility that the Central Bank might announc e the new measures at its monthly rate meeting on Thursday helped raise risk appetite, although German Finmin Shaeuble, warned against expecting too much as it was not within the bank's mandate to finance state budgets.

Gains were offset by the release of euro-zone Manufacturing PMI which showed activity fall to 45.1 from 45.3 expected. Falls were also recorded in the three leading economies – including Germany which saw a contraction to 44.7 vs 45.1 expected. The data raised concerns that the economic crisis in the periphery was worming its way to the core. Fears that the crisis is spreading would impact on the euro if Thursday's rate meeting proves disappointing.

GBP
Traditional British resolve may have shown through in better-than-expected data released on Monday. U.K Manufacturing PMI in August rose above expectations to give a 49.5 print when a more modest rise to 46.1 from 45.2 previously, had been expected. The strong result renewed languishing recovery hopes and saw a storming day for the pound which was the best performer of the majors on Monday.

The data was all the more impressive at is contrasted with Europe after eurozone core economies showed comparatively dismal results for Manufacturing in the same month. The data may help revive sterling's flagging safe-haven credentials. It may also lessen the likelihood of further QE from the BOE although a longer run of positive data is probable mandatory before a reassessment of the currently heavily accommodative policy stance.

JPY
The yen traded very narrowly and little changed on Monday. The risk-on atmosphere of the markets would have weighed on the yen, which prefers risk aversion to stimulate haven-buying. Recent data has cast aside recovery hopes after CPI released last week showed an even deeper fall into negative territory than expected as well as a slowdown in Industrial Production. There will almost certainly be more easing now from the BOJ, although the exchange rate is not really reflecting it and remains almost entirely tethered to eurozone expectations.

On the data front we had Capital Spending in 2Q which failed to rise as much as expected, going up to 7.7% when an 8.9% rise had been expected and 3.3% previous; Capital Spending Ex Software showed a similar below-expectations rise and Vehicle Sales (Aug) yoy fell to 7.3% vs 36.1% previously.