The U.S. Dollar weakened for the first time in four days against a number of its counterparts as stocks advanced following news that Euro region leaders may have reached an agreement. Reports stated that the European Financial Stability Fund (EFSF) may be enlarged and the European Central Bank is likely to re-start its covered-bond purchase plan. This helped ease tensions in the markets and brought about the return of risk appetite. On the economic front, U.S. New Home Sales dipped slightly from the month of July. Analysts expect the Dollar to remain weak for a short time as the global economy is fragile given the persistent sovereign debt problems. Meanwhile, Canada’s Dollar reached the lowest price in over one year versus the greenback on concerns that E.U. officials may not be able to prevent the sovereign debt crisis from spiraling out of control. Signs indicating a possible consensus out of the E.U. helped the Canadian Dollar rebound.

The Euro dropped at the start of the day and recovered at an amazing rate. The 17-nation currency advanced after the Euro region’s Commissioner, Olli Rehn, indicated that E.U. officials were contemplating numerous measures for enlarging the EFSF so it may be able to handle even a default by Italy. However, the Standard & Poor dimmed some of the optimism by stating they would downgrade the German and French credit rating if this were to take place. Lack of consensus between leaders is still dominating the scene and analysts worry that this may lead to a worsening of the situation before it has a chance to recover. The Pound Sterling continued to rally as optimism reigned in the markets following news that the EFSF may be enlarged and the ECB may restart its converted-bond buying plan. But analysts expect the Pound to drop sooner or later as the outlook for the U.K.’s economy remains pessimistic. Some of the Sterling’s gains were erased as a few members of the Bank of England’s board changed their stance on quantitative easing.

The Japanese Yen weakened after having risen during the start of the Asian trading session. Throughout the day, investors were set at ease by reports that E.U. officials were addressing a number of options to increase the EFSF so it could be of assistance in the event that Italy and Spain need bailing out. But in Japan, many businesses are bracing for the impact of an overvalued Yen and expect an intervention at some point soon. The Yen erased some of its gains through the American session, but fears are that the Japanese monetary unit will continue to gain as Euro zone leaders have not yet reached a full solution.

In the South Pacific, the New Zealand Dollar fell against the U.S. currency as government reports indicated that Trade Deficit widened. New Zealand’s imports surpassed its exports by $492 million in the month of August, according to yesterday’s metrics. The Aussie Dollar also slumped to a nine-month low versus the greenback as investors chose the refuge currencies on worries that E.U. leaders will fail to avert the sovereign debt crisis from worsening.

EUR/USD- Euro Rebounds Dramatically

According to officials, the EFSF has €440 bn out of which €142 bn have been allocated to Greece. In order to bail out Spain it would need €290 bn while it may take €490 bn to help Italy. Reports indicated that the E.U. officials are considering different ways by which to increase the EFSF, a factor that boosted optimism in the markets. However, a full consensus is still lacking which means the Euro is vulnerable to a worsening of the crisis. On the economic front, Germany’s IFO was positive for September as figures showed that Business Climate rose to 107.5; and Current Assessment went up to 117.9.

GBP/USD- Pound Rallies On Positive Reports

The British Pound rose in response to positive reports indicating that EFSF may be increased and the ECB may restart its quantitative easing program in order to boost bank balance sheets. A big order for the currency also fueled its rally. However, Monday’s gains were capped on speculations that further QE may take place. And although an injection of money into the market would help the lending sector, it will depreciate the Pound.

USD/JPY- Yen Gains As Debt Crisis Rages On

The Yen continued to advance on Monday while the Nikkei lost 2.17 percent on fears of contagion from the Euro region. However, investors relaxed and equities rose as reports indicated the E.U. officials were looking into options to enlarge the EFSF so it may cope with a bigger bailout. In the meantime on the economic front, statistics showed that a vast percentage of businesses are concerned that the overvalued Yen may impact their balance sheets, a factor that helped the currency’s rebound. But the Yen erased some of those gains throughout the American session as risk aversion diminished. Thursday will be an important day for the Yen as the economic calendar promises to be metrics rich.

USD/CAD- Canada’s Dollar Weakens To New Lows

The Canadian Dollar reached the lowest level in over a year versus its U.S. peer as concerns increased that Europe may not be able to forestall the debt crisis. The Loonie, as many people refer to Canada’s Dollar erased some of its losses as stocks climbed prior to the closing of the U.S. markets given signals by Euro region officials that they may have found the way to “tame the crisis.” Analysts believe this announcement came about following a statement by U.S. Treasury Secretary Timothy F. Geithner, who suggested that failure to address the problem would cause investors to withdraw their money from banks.

Today’s Outlook

Today’s calendar shows that Euro zone will report on Private Loans and the M3 Money Supply. The U.K. will release data on CBI Distributive Trades Survey. And the U.S. will issue reports on CB Consumer Confidence and the Richmond Manufacturing Index.

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