Dollar Weakens As Risk Appetite Returns On Bernanke And Merkel

The dollar index broke 79 handle overnight as sentiments were boosted by Fed Bernanke's comment on policy stimulus and German Merkel's comment on euro zone bailout funds. Asian equities are broadly higher following the 160pts rally in DOW. Gold also rebounded strongly on QE3 speculations and is heading back to 1700 level. The Japanese yen is also broadly weaker today as strength of last week's rebound faded. As noted yesterday, EUR/USD's break of 1.33 resistance cleared the near term picture and should trigger further selling in the greenback against European majors. Dollar index's break of 79 also affirm this near term view.

Fed Chairman Ben Bernanke stated that continuous stimulus from the central bank is need for further improvement in the job market. In a speech in Arlington, Virginia, Bernanke said that the decline in unemployment over the past few months might be "a reversal of the unusually large layoffs that occurred" in 2008 and 2009. Yet, the process might have ended. Further improvement in the employment market can, however, be "supported by continued accommodative policies". Investors viewed that the comments indicated further easing is likely. This has also revived hopes of QE3.

In the euro zone, Germany’s Chancellor Merkel stated that the ESM and the EFSF can run in parallel so that more funds can be used to resolve the sovereign debt crisis. According to Merkel, in order "to have the full EUR500B at our disposal, we could imagine that we let the programs that have already been disbursed run in parallel". In this care, the total size of the firewall would be raised to 700B euro.

Meanwhile, the ECB President Mario Draghi affirmed that the central bank would take "decisive measures" to fight against the crisis. Draghi stated that "no single institution can carry the burden of addressing a set of challenges that are simultaneously economic, financial and fiscal…The current stabilization should not make us pause in our responses".

The BoE quarterly bulletin said that "financial-market sentiment improved considerably over this period amid a range of actions by policy makers, both in the UK and abroad" even though, "concerns about the indebtedness and competitiveness of some euro-area countries persisted and remained a key influence". The bulletin hailed that ECB's LTRO "had relieved much of the funding pressure facing European banks in 2012," but warned that "banks continued to face elevated funding costs".

Separately, BoE Miles said that the "margin of spare capacity" in UK will depress "domestically generated inflation pressures". Meanwhile, he noted that "the best way that monetary policy can help improve the fiscal positions in the current environment is also by trying to create the conditions for non-inflationary growth." The timing of policy exit will depend on inflation outlook in medium term.

The Chinese yuan rose to a new record high against the dollar today after President Hu Jin tao told US President Obama that China will further reform the currency system and will "let the market play a greater role, improve the flexibility of the yuan exchange rate, and maintain a basic stability of the rate at reasonable and balanced levels." Nonetheless, Hu also noted that even a "large" yuan appreciation would not solve the problems in US. Hu urged US to lower the limits on high-tech exports to China to promote better trade balance.

On the data front, Japan corporate service price index dropped -0.6% YoY in February. German import price index rose 1.0% MoM in February. Swiss UBS consumption indicator dropped to 0.87 in February. German Gfk consumer sentiment, UK CBI reported sales, US S&P Case Shiller house price and consumer confidence will be released.