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By Andrew Wilkinson at IB:

The resumption of risk aversion has boosted demand for the Japanese yen and euro overnight while European stocks are weaker as lingering concerns over what impact sovereign debt issues might have on growth continue to swirl. Concerns were elevated when the Federal Reserve yesterday endorsed a view that growth at the margin had turned down while acknowledging that European fallout posed rising threats. For all of its follies, the euro remains remarkably resolute this morning and while cries for its future downfall remain louder than those of its buyers, the single currency remains well above its early June lows.

U.S. Dollar – Two dominant messages emerged in Wednesday’s session. The U.S. housing market recovery has spluttered to a standstill after tax credits expired. The policy of incentivizing buyers clearly worked and if nothing else, achieved some semblance of order within a market that became driven not by supply and demand of housing stock, but instead by the abundant supply of credit. Without stimulus the market has logically paused as the buyers rushing to take advantage have suddenly stopped. Arguably such support has helped steady the hand of the economy for some time. Disappointingly the number of new homes sold throughout May fell to the worst reading since 1963 records started illustrating the glut of existing inventory.

In its policy meeting statement the Federal Reserve was less upbeat about economic growth and warned that the moderate pace of growth is likely to prevail for some time. They also noted that “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.” The FOMC naturally reiterated its ongoing extended policy of low interest rates, noting that recent commodity price declines aided by falling energy prices had forged a lower path for inflation. The weaker tone immediately caused dollar sales, although no one was looking for signs of imminent yield increases, but one possible explanation is that by sounding more dovish might encourage global growth. This morning, however, dealers seem to be growing increasingly risk averse. The dollar index is a shade higher at 85.93 as the dollar takes on the commodity currencies.

British pound – The pound had a brief excursion above $1.5000 in early trading and remains the currency de jour after a couple of ratings agencies appeared to give a thumbs-up to the emergency budget. The pound remains higher on the day against the dollar at $1.4976 while a weaker euro allowed the pound to trade beneath 82.00 pence for the first time since November 2008, where it remains in early trading.

Euro – Things could be worse for the euro, which faced a strong close to Wednesday’s trade above $1.2300. This morning it has weakened to $1.2280 as Eurozone stocks and bonds continue to trade precariously. Speaking to Italian journal la Repubblica ECB President Trichet insisted that austerity packages ushered in by nations such as Germany would not strangle the recovery. And to raise the same issue as the Fed did yesterday, financial conditions might currently be adverse, yet recent manufacturing data has proved him right in that the real economy continues its recovery. This is possibly the key to why the euro remains far higher than any of the doomsters are predicting. Last week’s Commitment of Traders report clearly showed some frustration with the euro’s failure to decline as short positions collapsed. So far this week there is no justification to state that dealers are building fresh shorts.

Aussie dollar – A new day for Australia and a new Prime Minister too. We awake today to find that the ruling Labour Party has decided to oust Kevin Rudd and replace him with Deputy Julia Gillard. Politicians have clearly decided that Mr. Rudd was not likely to carry the party to a victory when elections are due in April 2011. One of the burning issues of the day is the super-mining tax proposed by the outgoing Prime Minister. Immediately Ms. Gillard said she was “throwing the government’s door wide open” to negotiate with the mining industry this unpopular measure. She remained vigilant, however, saying that Australia’s miners still need to pay more tax. The Aussie dollar jumped in response to reach 87.81 U.S. cents before rising risk aversion soured the pitch and the Aussie has slipped in New York to 86.58 cents.

Canadian dollar – Looking equally worn out by the recent risk-on-risk-off turmoil is the Canadian dollar honing in on Wednesday’s weakest moment at 95.54 U.S. cents and currently trades at 95.80 cents. Recently the Bank of Canada warned of the absolute low demand coming from the United States economy, meaning that it’s getting beaten up today as dealers not only reassess the potential for further delays in lifting monetary policy in Canada, but also from weakness in commodity prices, which are again tripped up by a stronger U.S. dollar. Crude oil prices remain depressed while gold remains near an all-time high.

Japanese yen – The yen appears to be a clear winner in all of this and today matched its highest price per dollar in a month at ¥89.25. Against the euro the yen rose to ¥109.62 while against the pound it rose to ¥133.90.