• for Continued Risk Aversion

The US Dollar (Ticker: USDollar) pushed broadly higher overnight, adding as much as 0.4 percent on average against its leading counterparts, as stocks slumped in Asia to drive demand for the go-to safe haven currency. The MSCI Asia Pacific regional benchmark index fell 2.2 percent. Eurozone debt crisis jitters set off early selling after Fitch put the credit ratings of France, Belgium, Spain, Slovenia, Italy, Ireland and Cyprus under review for a downgrade, saying a solution to the region’s sovereign risk predicament is “technically and politicallybeyond reach.”

The rout gained momentum following unexpected news that North Korean ruler Kim Jong-il has died, casting a cloud of uncertainty around the pariah state’s fate as well as that of its nuclear arsenal. The dictator’s youngest son Kim Jong-un is reportedly expected to take the reins after his two older brothers were sidelined in the succession process, the eldest for a botched attempt to visit the Disneyland in Tokyo and the next for being “too feminine”. This appears to make the landscape ripe for a power struggle. Indeed, if the deceased Kim’s own experience when he took over from his father is any indication, it will take at least several years for a single leader to consolidate power, hinting a period of regional instability may be ahead.

Looking ahead, the spotlight turns to a French bond auction where the Eurozone’s second-largest economy is set to sell as much as €7 billion in short-term paper. Traders will keep a close eye on demand levels and prevailing yields after the pickup in sovereign pressure overnight. Elsewhere, Eurozone finance ministers are expected to hold a conference call at 2:30 GMT to finalize details for channeling additional bailout funds to the IMF. Regional credit-default swap (CDS) rates – a measure of insuring against a default that rises at times of increasing stress – are ticking higher ahead of the opening bell in Europe, hinting the markets remain on edge. S&P 500 stock index futures are also firmly in negative territory, reinforcing the case for risk aversion and promising continued gains for the US Dollar.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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