Dollar bulls remain in control with the greenback rising to 3 month highs against the euro and 2 month highs against the British pound and Australian dollar. Traders across the globe are reacting to the more upbeat and hawkish tone from the Federal Reserve by selling equities, selling gold and buying dollars. The only mismatch is in bonds with Treasury yields falling across the board.

Risk aversion is also helping the dollar as Greece's problems prove to be only the tip of the iceberg for the Eurozone. This morning, Standard & Poor's announced plans to reevaluate the ratings of more than 1.46 trillion euros of covered bonds. Lower ratings would deal a further blow to the attractiveness of euro denominated assets.

Philly Fed and Leading Indicators Beat, Jobless Claims Disappoint

Meanwhile, stronger than expected manufacturing activity in the Philadelphia region offsets the decline in manufacturing activity in the Empire State. The Philadelphia Fed survey rose to the highest level since Feb 2005, which suggests that manufacturing sector is still chugging along. Leading indicators also rose by 0.9 percent thanks to an improvement in jobless claims, average workweek, building permits and consumer expectations. The only dark cloud in this morning's report were jobless claims which increased for the second week in a row. Weekly claims rose from 473k to 480k while continuing claims rose from 5.181M to 5.186M. Since the first 2 weeks of the month are survey weeks for non-farm payrolls, there is a good chance that the U.S. economy endured net job losses last month. Dollar bulls may have to wait until January for positive job growth to return.
Bernanke Vote

Finally, the Senate Banking Committee is set to vote on Bernanke's confirmation today. Ultimately he will be confirmed for another term as Fed Chairman but not before a round of heated debate between Senators on the effectiveness of his leadership.

Dollar hit a 3 month high against the euro in Asian session trade today in the aftermath of the decision by the S&P to revaluate the ratings of more than 1.46 Trillion euros of covered bonds. Covered bonds are secured by assets like residential-mortgage loans but remain on a bank's balance sheet, and in the case of a default investors have a claim both on the bank that issued the bonds and the assets backing them.



The S&P move was procedural in nature rather than a response to a new credit threat. Nevertheless, the ratings agency noted that “New risks to the creditworthiness of covered bonds have emerged during the financial crisis. One of the key considerations in our analysis of covered bonds--the ability to refinance or sell assets in the event of a bank failure--can be compromised in a highly stressed environment."

Covered typically carry a shorter maturity than the asset they back, putting the banks at the risk of a maturity mismatch that could create serious re-financing difficulties in times of credit stress in the capital markets.

The S&P news was only the latest credit concern to hit the Eurozone, which has seen the ratings of its member Greece lowered to BBB+ from A- by S&P. Fitch lowered Greece’s rating two days ago. The combination of lingering credit problems in the Eurozone along with a more upbeat assessment of the US economy by the Fed has created a cascade of stop running in the Asian session as first the psychologically key 1.4500 level gave way and then 1.4400 barrier broke as well.

The pair now finds itself at key support level of 1.4400 and may consolidate there for most of the European session given the absence of any event risk on the calendar. Still the sharp selloff has caught many late EUR/USD bulls by surprise and if the US data today proves supportive to the greenback the liquidation by euro longs could accelerate suggesting the possibility of a test of 1.4000 figure before the year end.