Dollar Mildly Lower as Risk Recovered after EU Summit

Dollar is back under some pressure as risk markets recovered from Monday's selloff. DOW staged an impressive rebound from intraday low of 12529 to close at 12653, just down -0.05%. Asian indices are seen generally higher as markets find some bids. After the EU summit, 25 of 27 EU countries agreed to the so called fiscal compact. Only UK and Czech Republic, which are not Eurozone states, refused to sign the compact in March. ECB President hailed the agree as the first step towards a "fiscal union" and will "strengthen confidence in the Euro area". Also, EU leaders agreed that the EUR 500b permanent rescue fund, the European Stability Mechanism will be operational in July, a year ahead of planned. However, the issue on raising the ESM/EFSF ceiling was not discussed until the next summit in March.

Under the fiscal compact, the states who signed are required to introduce balanced-budget rules into their constitutions. The states are required to cap annual structural deficits at 0.5% of GDP. Automatic correction mechanism will be triggered if the limit is broken. Also, the cases could be taken to European Court of Justice, which could impose a fine of up to 0.1% of GDP. Such fine will be paid into the ESM. The new treat will come into force after being passed by parliaments of at least 12 countries in the Eurozone. And, only those which ratified the treat could get support from ESM.

Greek Prime Minister Papademos said that there was "significant progress" in the debt-swap negotiation after meeting with ECB and EU. Papdemos said they're seeking to "conclude negotiations with the troika by the end of the week." He mentioned that the main sticking points with troika are deeper spending cuts and labor market reforms. Meanwhile French President Sarkozy said he'd also expect a deal within days and he believed that European institutions, would help meet the funding gap.

After USD/JPY broken near term support of 76.55 yesterday, Japan Finance Minister said that the he's "ready to act decisively against excessive and speculative currency moves if needed". But so far, markets have little reaction to his comments. Data from Japan saw manufacturing PMI improved slightly to 50.7 in January, household spending rose 0.5% yoy in December, industrial production rose 4.0% mom in December, housing starts dropped -7.3% yoy in December. Unemployment rate rose to 4.6% in December.

Other data released saw New Zealand building permits rose 2.1% mom in December. UK Gfk consumer sentiment improved to -29 in January. Australia NAB business confidence rose to 3 in December. Looking ahead, German and Eurozone unemployment, UK mortgage approvals, M4, Canada GDP, IPPI and RMPI and US house prices, consumer confidence will be released.