Dollar Tone Improves As Risk-On Fervor Calms

The euro's recovery from a near-two month low continued in anticipation of year-end generosity form the ECB. On Thursday the 16-nation central bank left interest rates alone but it won?t be until the press conference later in the day that we find out whether it intends to expand its bond purchase program. Dealers are also hoping that incessant pressure on weaker economies within the Eurozone will force it into a change of heart over a gradual reduction in liquidity as it tries to walk away from emergency measures.
Euro – Third quarter growth remained robust across the Eurozone in a report released earlier. The economy expanded at a pace of 1.9% on an annualized basis consistent with the performance in the three months to June. Producer prices for October remained elevated and came in slightly above forecast at 4.4% over the year earlier, although this is not adversely impacting consumer prices. Following Tuesday's slump in the euro to its lowest against the dollar since mid-September, dealers are taking advantage of a near-term bullish technical picture and see little rationale to pound it further into the ground until after hearing what ECB President Jean-Claude Trichet has to say. However, the prospects don't look especially appealing at present. The run on the euro comes as a result of building pressure on peripheral nations, which investors fully expect to mutate into a larger-scale problem for a bigger economy such as Spain unless the ECB acts differently. But by stepping up its bond purchase program, the ECB would start to look an awful lot like the Fed. The Bank of England appeared chastened just two months ago when fervor surrounding the Fed's anticipated easing carried sentiment towards more easing in Britain and damaged the pound. Much of the euro's strength over the summer came as a direct result of looking like a hard and viable alternative to the dollar. That doesn't seem the case any longer. Ahead of the press conference the euro traded up at $1.3160.
U.S. Dollar – The Fed's Beige Book was another piece of mildly encouraging news for the economic recovery on Wednesday. The dollar is under a mild amount of pressure as the euro recovers but elsewhere is beating back the fires as it advances against other currency pairs. The dollar index has rebounded from earlier lows and stands at 80.61 this morning. Data-wise the dollar later faces October existing home sales, which are expected to show another weak month with sales down 1%, while initial claims data should be of interest today. Last week's slide to 407,000 will be watched for revision from a two-year low and is likely to whip up enthusiasm for a big employment number on Friday. Analysts predict a reading of 424,000 first-time claimants through last weekend.
British pound – A PMI construction report again fooled analysts by rising rather than falling for November.

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