Rising US treasury yields and stronger than expected October retail sales data yesterday helped the dollar climb to a six-week high against a basket of currencies. Yesterday also saw the president of the Richmond Fed say that the Fed might need to tighten policy to avoid a surge in inflation. Adding to the increasing unease over the second round of quantitative easing (QE2) were reports that a group of prominent Republican-leaning economists were to launch a campaign calling for the Fed to abandon the scheme.

The euro traded as low as $1.3562, though the USD eased off this level on dovish comments from Federal Reserve officials. New York Fed President William Dudley was quoted as saying that the need to exit from current policies could be “years away”, with comments from Fed vice chairwoman Janet Yellen equally dovish. Their remarks could have been aimed at tempering the rise in yields, which is undermining current policy objectives.

The key focus for markets, however, remains fiscal problems in Europe with speculation continuing as to whether or not Ireland will seek EU support. Portugal is also in the spotlight and markets will be closely watching meetings of European finance ministers which take place today and tomorrow. Markets will also be watching this morning’s release of the German ZEW survey for November. Seen as a key leading indicator, the survey of economic expectations is forecast to show a modest improvement from last month, though this will still leave it well below cyclical highs seen late last year.

Sterling continues to edge higher versus the euro, supported by the eurozone’s debt problems. Versus the dollar, meanwhile, it is holding around the $1.60 level after falling back yesterday on weak house prices. Today sees the release of the UK inflation report for October. Forecast at 3.1%, the headline CPI rate is expected to remain stubbornly high and well above the Bank of England’s 2.0% target. Also due later today are a host of US stats, including industrial production for October.

Today’s headlines still revolve around the potential bail-out of Ireland and Portugal, with Eurozone finance ministers looking to press them both on their plans at the meeting of finance ministers in Brussels today. Portugal’s finance minister said that investors believed Lisbon was increasingly likely to be forced to turn to emergency help because of contagion in the financial markets, and called the overall stability of the Eurozone into question. Many investors consider Ireland to be almost certain to need financial support, with Portugal to follow.

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Tom Trevorrow

Senior Trader

Tel: +0044 1736 335264

Email: tom.trevorrow@torfx.com