Daily Report: Dollar Resumes Decline as Markets Cheer EU Progress

Dollar is broadly lower today as markets cheer the progress made by EU summit overnight. Expectations were low just before the summit and thus, the surprises were quite pleasant. The raising of bank capital requirement and explicit deadline of June was well received. EU also agreed with Institute of International Finance on a deal that imposes 50% losses on Greek debt. Also, EU leaders have agreed to leverage the EFSF fund by four to five times to around EUR 1T. DOW staged an impressive late rally to close 1.39% higher and the positive sentiments carried on to Asian session. Dollar resumed recent decline against Euro, Aussie and Canadian dollar and is soft against, Swiss franc, yen and sterling. Dollar index dropped to as low as 75.59 so far and is set to extend recent decline from 79.838.

European banks are now required to have a 9% core tier 1 capital ratio by the deadline of June 30, 2010. The ratio was significantly higher than the passing mark of 5% of the stress tests in summer. More overall, the capital levels now needed to be calculated after marking down government bond holdings as of September 30. The capital target is seen as an effective way to create a "temporary buffer" to insulate banks from further turmoil. National governments are required to provide support to the recapitalization. Loan from EFSF would be provided in case Eurozone governments are unable to provide the support needed.

A deal is struck with private banks on a "voluntary" 50% haircut on Greek's debt in the second bailout for Greece. The new package include EUR 130b of aid, up from EUR 109b concluded in July. The IIF chairman Joself Ackermann described the deal as a "concrete voluntary agreement on the firm basis of a nominal discount of 50% on notional Greek debt held by private investors with the support of a EUR30 billion official PSI package." And, the terms of PSI "will be agreed by all relevant parties in the coming period and implemented with immediacy and force."

EU leaders also agreed on principle to leverage the EFSF by 4-5 times but the details would be decided in November. It's reported that the boost will be done by using a combination of 'the first loss insurance model' and the 'special purpose vehicle model' (SPV). Also, EU will try to seek contribution from China as EFSF CEO Regling visits Beijing on October 28.