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ECB to reactivate SMP and buy Italian and Spanish bonds, S&P downgrade sends US dollar to record lows ahead of FOMC, while Japanese officials fret about yen strength as gold surges. Gold breaks above $1700, Gold/Oil Ratio highest in Dec. Link to Monday's Premium Trades is below.

Equity markets have continued their declines in Asia overnight as fears about central banks ability to deal with the unfolding crisis in Europe, and concerns about the US economy gather pace in the wake of the weekend decision of S&P to downgrade the US.

The decision by the ECB to reactivate its bond buying program could well bring some respite to Spanish and Italian bond yields, however given the level of the problems in the Euro zone it isnt likely to change the problems facing the euro area in the longer term. The pledge was in response to the announcements made by the governments of Italy and Spain over the weekend concerning bringing forward new measures as well as reforms in fiscal and structural policy. The council also noted the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.

Standard and Poors decision to downgrade the US triple A credit rating while creating a political storm surely cant have been too much of a surprise given the agencys recent comments and the debacle over the debt ceiling. As it is the US dollar hit fresh lows against the Swiss franc in Asia overnight as investors continued to flock towards the perceived sanctuary of the Swiss currency. Fears that the rise in the Swiss franc is damaging the Swiss economy caused Swiss National Bank governor Hildebrand to call the current level of the franc absurd on Friday. The recent steps taken by the SNB to try and devalue the franc last week though could well exacerbate the problem, given that in cutting rates to zero, the Swiss franc can now be seen as a funding currency for the carry trade, in the same way the yen has been used in recent years.

The recent move by Standard and Poors has also kept the pressure on the Japanese currency as it continues to gain, moving back towards its all time lows at 76.20/30 once more. Japanese officials have reiterated their determination to sell yen to try and exert downward pressure on the currency.

Gold prices have surged with the yellow metal hitting record highs above $1,700 an ounce.

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