The latest auction statistics suggest that the market's appetite for long-term US paper remains intact, for example the $40bln in 2-year notes released a month ago covered 2.72 times. That very week also saw cumulative supply of $101bln-the same as this week's-and failed to rattle investors. However, the market has seen structural shifts over the past month as economic conditions improved and debasement fears have begun to undermine any positives obtained from the Fed's credit easing programs. Better risk appetite may have also supported demand for non-US assets, especially now that there is a strong possibility of a "decoupled" global recovery. Nevertheless, we believe it is premature to expect sustained dollar weakness as many of the market's assumptions over risk and growth are optimistic at best. Dollar-funded "re-leveraging" flows still look heavily speculative in nature, implying that a sharp snapback is possible at anytime, especially if growth numbers begin to disappoint. Yesterday's Ifo survey came in below expectations and the ECB may yet see plaudits over its monetary restraint evaporate as the Eurozone economy stays in the doldrums. Finally, the amount of fiscal stimulus being launched across the world suggests that all major economies will face fiscal pressures in the coming quarters and it is only natural for investors to demand higher risk-premiums across the board. Ratings agencies' views are also divergent at this stage and downgrades in either the UK or the US are not our central scenario. The main risk to these currencies is whether sovereign bidders finally lose appetite and shift their focus. As such, a low indirect bidder participation rate during this week's auctions may also damage the dollar, but we also note that it is not in the interests of the world's major reserve holders to act disruptively at this stage.

Source: UBS, Bloomberg, Chris Lori

Tags: Risk Appetite