British Pound Top Performer in Thin Markets

European Session Summary

Trading conditions remained especially thin on Tuesday, as English speaking countries, mainly Canada and the United Kingdom, celebrated national holidays. Typically, the weeks leading up to and after Christmas are slow, as many trading desks around the world are closed. Higher yielding currencies had underperformed headed into the North American trading session, while the Euro was softer as well.

Notably, the Italian 10-year bond traded back above the 7 percent yield, a rather disconcerting development as it appears banks, at least those active in the market, have taken the European Central Bank’s long-term refinancing operation as an opportunity to pad their balance sheets rather than soak up increasingly toxic sovereign debt. But, given the circumstances, who can blame the banks? New rules require banks to raise capital by June 2012, and instead of trying to raise capital and convince market participants of their solvency, borrowing at 1 percent in unlimited amounts is rather appealing.

The ECB’s LTRO helps liquidity, but like the swap lines the Federal Reserve initiated on November 30, it fails to address the issue of solvency.

Dow Jones FXCM Dollar Index: December 27, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Overall, the U.S. Dollar is trading slightly lower across the board, with the U.S. Dollar Index (Ticker: USDOLLAR) falling slightly in premarket hours. While the Australian Dollar and the Euro were softer against the Greenback, the British Pound, as the best performing currency on the day, sank the index. Later today, with U.S. consumer confidence for December due out, a bump in volatility is expected, though any disruption of the sideways trend is unlikely to occur until next week.

24-Hour Price Action

Key Levels: 14:25 GMT

Thus far, on Tuesday, the Dow Jones FXCM Dollar Index is slightly lower, trading at 9954.10, at the time this report was written, after opening at 9967.87. The index has traded mostly lower, with the high at 9973.67 and the low at 9946.90.

--- Written by Christopher Vecchio, Currency Analyst

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