Keeping A Cap On Risk Appetite. By Nicholas Hastings

Global risk appetite is strong and could well get stronger this week.

But, this is the holiday month of August and U.S. non-farm payrolls are due on Friday.

So while the risks in the dollar may be to the downside, the U.S. currency may well find it gets some respite.

The dollar's trade-weighted index has continued to fall to new lows for the year as investor confidence in the global economic recovery has increased.

This confidence is likely to get a further boost if the Bank of England and the European Central Bank leave their monetary policies unchanged as many expect later this week.

There is a chance that the U.K. central bank will decide to suspend quantitative easing for now, but such a move would raise expectations of a recovery in the U.K. economy.

For the most part, economic data has been mixed but market reaction has been nearly invariably positive.

Take last Friday's GDP data from the U.S. The headline 1.0% contraction in economic growth was better than expected largely because of revisions to the data. But the consumer spending component showed a nasty 1.2% decline in the second quarter and risk appetite failed to fall for long.

Even mixed data out of Europe early Monday, with a sharp 1.8% fall in German retail sales but an improved manufacturing purchasing managers' index out of the euro zone, failed to stop equities from rising.

However, attempts by the euro to capitalize on this trend have proved feeble. The single currency did push up to a new two-month high of $1.43 but quickly slipped back again as investors show little sign of wanting to stick their necks out.

And this state of affairs will more than likely remain until U.S. payrolls are released at the end of this week.

Forecasters are expecting the figures to show a 275,000 decline in July, somewhat less than the 467,00 fall registered in June.

The numbers should contribute to the impression that global economic conditions are improving. But, analysts noted that the release of other figures before then, including Monday's Institute of Supply Management survey as well as the ADP data on Wednesday, will mean that forecasters will continue fine-tuning their predictions.

Apart from the uncertainty over payrolls, currencies are also likely to suffer from the sheer lack of business as many players head off on holiday.

On the one hand, this could reduce turnover and suggest that currencies are more likely to remain in their recent ranges.

On the other hand, low turnover can make currencies more volatile, especially if there are unexpected surprises.

As these risks are more likely to be on the upside, the dollar could well prove vulnerable to another sharp improvement in risk appetite.

Early Tuesday in Europe, there were already signs of investors turning wary, especially after the Reserve Bank of Australia failed to be quite as hawkish as many expected.

Although the Australian central bank dropped its easing stance, it appeared reluctant to encourage rate hike expectations. This was hardly surprising as Australian retail sales came out showing a 1.4% decline rather than a 0.5% rise as expected.

As some of the recent global recovery euphoria died down, the dollar fell back to Y95.08 by 0645 GMT from Y95.37 late on Monday in New York.

The euro also fell back from earlier highs to trade flat at $1.4415 and was down at Y137.10 from Y137.43.