Risk appetite improves, lifts euro and other riskier currencies

Euro

The euro zone slipped into a recession for the second time in four years, as governments imposed austerity measures and strict budget cuts to curb the sovereign debt crises that are weighing on growth in the region.

Growth in the euro area shrank by 0.1 percent as expected in the third quarter, from a 0.2 percent contraction the previous quarter. Compared to the same period last year, growth contracted by 0.6 percent as expected in Q3, down further from 0.5 percent contraction in Q2.

The euro pared its losses against the greenback on Friday and rose higher on Monday, staying away from its recent two-month trough hit earlier last week. EUR/USD bounced from its two-month low last week at 1.2662 versus the dollar.

It recovered to hit a week's high of 1.2802 as forex investors expected Greece's international lenders to agree and disburse immediate aid that is crucial to avoid bankruptcy. The pair was also supported by a jump in initial jobless claims in the US that showed the job recovery was failing to gather traction.

Data published by the Labor Department, which showed that consumer price inflation climbed at its slowest pace in three months in October, also pushed the EUR/USD higher, as the data evidenced inflation remained in check and increased speculation of more easing by the Fed.

Consumer prices in the US climbed at their slowest pace in three months in October, the Labor Department said on Thursday. The latest data published showed inflation in the world's largest economy was in check, giving the Federal Reserve more flexibility in its policy decisions.

US Dollar

The US dollar fell against all of its major counterparts at the start of the week as optimism that US lawmakers will strike a deal on the nation's budget and prevent the so-called 'fiscal cliff'.

US equities closed in positive territory last Friday, but still ended the week lower and trading lower for the month to date.  Lifting US shares higher on Friday were some positive comments regarding 'fiscal cliff' talks.

Investors described talks between President Obama and Congressional leaders as 'promising', and market sentiment improved. Optimistic remarks by US Treasury Secretary Timothy Geithner late on Friday deserved most of the credit, as he said a budget deal on the fiscal situation could be reached in "several weeks".

Consumer prices climbed slower in the United States during October, giving the Federal Reserve more leeway in its monetary policy decisions.

Japanese Yen

The Japanese Yen fell to a seven-month low versus the dollar on Monday, prompted by concerns of more monetary easing in Japan, while improved chances of a resolution to the US 'fiscal cliff' helped the euro and riskier currencies.

USD/JPY rose to 81.58 on Monday, extending its rise after posting its steepest weekly gain since February.  EUR/JPY rose to this month's fresh high, by 104.10 on Monday as risk appetite dampened demand for safe-haven currencies.

Asian shares tracked US markets higher at the start of the week trading mostly in the green on Monday. The Japanese Nikkei stood out and surged more than 1.4 percent on Monday, extending its 2.2 percent gains from Friday, to close at a two-month high. 

Hopes on an agreement to solve the 'fiscal cliff' and expectations that a new government chosen in next month's election would drive larger amounts of stimulus into the economy boosted risk appetite in Asian trading.

Australian Dollar

The Aussie rose on Monday, lifted by better risk sentiment after President Obama expressed confidence that the 'fiscal cliff' can be avoided, which boosted global stocks and increased demand for higher-yielding currencies.

AUD/USD rose to 1.0417 while AUD/JPY jumped to 84.61, it's highest since April of this year, with expectations that a new government in Japan will put pressure on the Bank of Japan to increase monetary stimulus.

This week the Reserve Bank of Australia will release its minutes from the policy meeting in November. Much scrutiny will probably be given to the RBA's decision that, at its last meeting, yielded a surprise hold despite how many analysts were expecting a cut.

In addition, RBA Governor Glenn Stevens will also be speaking on Tuesday, and forex investors will be looking for clues on future policy direction. If Stevens reinforces the view that further easing is off the radar and maintains a hawkish bias, it may give scope for another year-end surge in Aussie crosses.

The author is a Senior Market Analyst on RTFX Ltd's Trading Floor.