Talking Points

• US Dollar Slumps as Stocks Rise in Asia, Denting Safety Demand
• Merkel/Lagarde Meeting, Greek Bill Sale Lead European Calendar
• S&P 500 Index Futures Hint Recovery in Risk Appetite to Continue

TheUS Dollar (ticker:USDollar) traded broadly lower in overnight trade, down as much as 0.3 percent on average against its leading counterparts, as gains on Asian stock exchanges sapped demand for the safe-haven currency. The MSCI Asia Pacific regional equity benchmark index rose 1.1 percent afterUS Consumer Credit rose to $20.4 billion – the highest in at least 4 years – whileChineseImports grew at the slowest pace in 26 months. The former release suggested demand was picking up in Asia’s go-to export market while the latter hinted Beijing may press forward with additional reserve ratio requirement cuts after reducing the rate to 21 percent in December. Not surprisingly, thestocks-correlated Australian, New Zealand and Canadian Dollars outperformed.

Looking ahead, the economic calendar is quiet in European hours.Greece will sell €1.25B in 182-day bills, but the short tenor of the securities on offer and the already well-established predicament facing Athens at least over the near term is likely to keep the outcome from being particularly market-moving. Indeed, Eurozone debt crisis have been focused on larger economies (Spain, Italy and to some extent France) too big to be bailed with existing rescue facilities, of which Greece is clearly not a part. A meeting betweenGerman Chancellor Angela Merkel and IMF Managing Director Christine Lagarde may prove to be more interesting. The German leader met with her French counterpart yesterday, where the two said they may complete new budget rules for the Euro area by the January 30 European Union summit, one month ahead of schedule.

On balance, while yesterday’s Merkel/Sarkozy meeting was not a game-changer in that traders learned little in terms concrete policy prescriptions for containing the debt crisis, the outcome likewise didn’t add anything substantially more negative into the equation. Expectations of a similar outcome to the Merkel/Lagarde outing combined with hopeful sentiment ahead of the fourth-quarter corporate earnings reporting season against a backdrop of improving US economic data appear to be fueling profit-taking on risk-aversion bets. This seems likely to continue weighing on theUS Dollar over the near term after net speculative long positions on the go-to safe haven currency held near the highest in close to three months last week. Indeed,S&P 500 stock index futures are pushing firmly higher in late Asian trade, hinting the pick-up in risky assets is likely to continue.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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