Dollar Soft after Fitch's Rating Outlook Downgrade

Dollar remains a bit soft in Asian session today after Fitch downgraded US's AAA rating outlook to negative, noting “declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path will be forthcoming.” The negative outlook indicates a slightly greater than 50% chance of a downgrade over a two year horizon. That followed the supercommittee's failure to reach a deal last week, which could now trigger a $1.2T automatic cut that starts in 2013. Fitch wanted that if no "credible" agreement is reached over the next two years on debt reduction, it could downgrade the rating. Worsening of economic and fiscal outlook could also trigger a downgrade by the end of 2013.

Moody's, on the other hand, said it's reviewing subordinated and junior debt from 87 European banks in 15 countries, including Spain, Italy, Austria and France. Moody's warned that Eurozone's sovereign debt crisis have reduced government's ability to support banks in the region. And, the rating agency is no longer incorporating government's implicit support for banks' subordinated debt as a positive factor. And, the subordinated debt might be downgraded by two notches, while junior subordinated debts by one notch.

EU Finance Minister meeting will be a major focus today as they're expected to lay out the details of leveraging the EFSF and release of the next tranche of bailout fund for Greece. The plan for EFSF would including intervention on primary and secondary bond markets and extending precautionary credit lines to troubled countries. It should also clear the way for EFSF to attract private and public investors to its co0-investment funds, thus leveraging its fire power.

In addition, markets will also pay close attention to bond auctions in Italy and Belgium. Italian Treasury is set to sell as a maximum of EUR 3.5b of three-year bonds, EUR 2.5b of 2022 bonds and EUR 2b of 2020 bonds today. Belgium will sell EUR 1.4b o bills today. Later in the week, Spain will sell debts maturing between 2015 and 2017 while France will sell bonds for securities maturing from 2017 to 2041.

On the data front, Japan unemployment rate jumped to 4.5% in October, much worse than expectation of 4.2%. Household spending dropped -0.4% yoy while retail sales rose 1.9%. Swiss UBS consumption indicator, UK mortgage approvals and M4, Eurozone confidence indicators will be featured in European session. US house price indices and consumer confidence will also be released later today.