Expectations that with a lack of data yesterday would be a quiet, conciliatory day were spectacularly wrong yesterday as currencies recently on the back foot, including the pound, fought hard to make gains.

The US dollar fell in the early part of trading as Chinese officials stated that reserve diversification away from the greenback was likely in favour of EUR and JPY. This later turned out to be a rogue statement from an employee in one of the central bank’s regional offices who said that it was only a “personal” view come the afternoon’s trading.

Dollar also strengthened after lunch as downgrades to the US financial sector hit risky assets. Dick Bove is a prominent financial analyst in the US and has downgraded 4 banks in the past 4 days; this bearishness caused a wholesale sell-off in asset classes. Equity markets lost 1%, gold dipped below $1050 and oil fell from above $80 a barrel to test the $78 level. With a shrinking risk profile investors flooded towards US treasury debt with an overnight auction of TIPS doing particularly well.

We do not think this USD strength is to continue for long and expect a significantly lighter USD by Christmas.

Sterling was also one currency that was particularly hardnosed on Monday’s markets. After initially dipping to 1.0830 against the euro it put on over a cent to finish just shy of 1.10. This can be put down to pure profit taking after sterling’s dramatic dump on Friday.

As we highlighted yesterday Adam Posen, the newest member of the MPC, spoke at the Cass Business School yesterday on QE; his speech had little impact on sterling but confirmed that come November he will be voting ‘yes’ to QE increases.

Data is dollar centric today with Case-Shiller house prices and CB consumer confidence due.

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