The US Dollar fell overnight and appears likely to extend losses as hopes for a deal to avert the US “fiscal cliff” buoy risk appetite across financial markets.

Talking Points

US Dollar Sold as Aussie Outperforms on “Fiscal Cliff” Solution Hopes
S&P 500 Points to Risk Appetite Recovery to Start the Trading Week

The US Dollar declined against all of its leading counterparts in overnight trade as risk appetite recovered, denting demand for the go-to safe haven currency. The MSCI Asia Pacific regional benchmark index rose more than 1 percent while the Australian Dollar outperformed, adding as much as 0.3 percent on average against its leading counterparts. The newswires are attributing the chipper mood to a vaguely promising meeting between US President Obama and Congressional leaders on Friday that seem to be buoying hopes for a compromise to avoid the so-called “fiscal cliff”.

Failure to reach a deal will trigger the onset of steep tax hikes and budget cutsat the turn of the calendar year. The Congressional Budget Office (CBO) estimates that if the hefty dose of austerity is allowed to proceed as-is, it stands to trim US GDP growth by a hefty 0.6 percent in 2013, tipping the economy into recession in the first half of 2013.In an environment where investors are hoping a firming US recovery will help countervail headwinds from Europe and Asia, the prospect of avoiding a scenario seems reasonably positive for sentiment, although follow-though is suspect for now until something concrete emerges.

Looking ahead, October’s US Existing Home Sales data headlines a quiet economic calendar. Expectations point to a print at 4.75M, matching September’s outcome. Absent a sharp deviation from expectations, the outcome seems unlikely to yield much in terms of directional momentum. On the sentiment front, S&P 500 futures are pointing firmly higher, suggesting the risk-on tone is likely to carry forward in the hours ahead and continue to put downward pressure on the greenback. Technical positioning reinforces the likelihood of such a scenario.

Asia Session: What Happened

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