Morning Forex Overview

Previous session overview

Yesterday equities remained under pressure on ongoing concerns about the
health of the financial sector and the outlook for the global economy. In Europe, the equity indices lost more than 2% and also in the US equities closed once again lower. The S&P 500 was down 0.93% on the day. This morning,Asia performs rather well on the back of a surge in Chinese equities, which are supported by rumours about a fiscal stimulus package.
Despite the weak performance of the equity markets, bonds couldn't hold on to their early gains, as fears about inflation resurfaced on the back of the upward surprise in the US PPI data and hawkish comments of Fed's Fisher and Lacker. Both suggested that the Fed must be prepared to act if the economic slowdown doesn't moderate the increase in prices. Bonds both in the US and in Europe reversed early gains and closed the day mixed with the curve a tad steeper. In the US, yields were down 3.5 bps at the short end and up 3 bps at the ultra-long 30-year segment compared to 1 bps and 4 bps in Europe. As such, US Treasuries failed to break decisively above the July highs, which would have improved the technical picture.
On the forex market, the dollar touched a six-month high against the euro, but also reversed course later in the day on the persistent financial stress in the US and the rebound in the commodity markets, where oil and particularly gold rebounded strongly. Gold rose about 20 USD/ounce and is back above the 800 USD/ounce.
U.S. data out Tuesday also damaged the dollar. A report on housing construction showed an 11% decline in July, while U.S. wholesale prices hit a 27-year peak last month as higher energy costs drove up the prices of automobiles and capital equipment.Analysts said the greenback had become overbought following its fast and steady 9% rise against the euro since mid-July and was in need of a retracement.
The euro reached a high of $1.4793 Tuesday, and late afternoon in New York was at $1.4774, up from $1.4698 late Monday. Against the yen, the dollar was at Y109.68, down from Y110.07, while the euro was at Y162.01, up from Y161.80, according to EBS. The U.K. pound was at $1.8651, little changed from $1.8652, and the dollar was at CHF1.0920, below CHF1.0979 late Monday.
Crude oil prices rose above $114 a barrel Tuesday, causing some investors to sell dollars in order to establish long oil positions, or bets that crude prices will rise. These dollar sales had the effect of driving down the value of the greenback.
In other currencies, sterling stabilized against the dollar after sharp declines in recent days. It remains 8% weaker than its levels in mid-July, when it was trading above the symbolic $2.00 level.

Market expectation

Today, the calendar is very thin in the US and Europe. In the UK, the Minutes and the CBI industrial trends survey will be published. But following last week's BoE's inflation report, the Minutes shouldn't contain much new information.
Driving the dollar higher over the past month was a prevailing market view that the U.S. economy would start to rebound just as the rest of the world began to come unglued. The picture now emerging is slightly different, one in which both the U.S. and other global economies suffer at the same time - a scenario which isn't quite as positive for the greenback.
It should be noted, however, that the dollar's declines Tuesday were modest and probably don't suggest the dollar is headed back anytime soon to its all-time lows reached in mid-July, when the euro hit $1.6040.
For Wednesday, there's no key U.S. data for currency traders to focus on, so other asset classes such as oil and stock markets are likely to remain key drivers.