Currencies
The dollar rose against the yen but slipped against euro. The yen was affected by the ongoing drama surrounding the bank bailouts. Market sentiment is clear - no matter what happens with Japanese bank reform it is bound to be yen negative. If government efforts prove to be just another failed Japanese plan with no meat or teeth, then the yen should weaken. Conversely, if the government does institute real reform, then Japanese bank stocks will fall further and some banks might fail. When market players all agree on one direction, everyone gets loaded up with the same position; risk is increased if events run opposite to what the market expects.

Market analysts expect the dollar to rise in coming sessions because much of the bad economic news has already been discounted and investors are shifting their microscopes to the vast economic underperformance of Europe and Japan. The United States is a clear winner in comparison. Investors looking for policy flexibility in Europe, either monetary or fiscal, stand to be disappointed. Given the Japanese economy, the dollar should also strengthen versus the yen. Significant yen depreciation may be needed over the medium term to stimulate the economy.

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