The Euro was unable to sustain a position above the 1.30 level on Friday and weakness in Asia was maintained in European trading with a trough around the 1.2765 level, the lowest Euro level since the second week of December.

The dollar continued to gain some support from defensive demand as risk appetite remained subdued with stock markets generally on the defensive for much of the day.

The flash Euro-zone PMI data was slightly stronger than expected with the manufacturing index edging higher to 34.5 for January from 33.9 previously while the services-sector index rose to 42.5 from 42.1. There was also a small improvement in the Belgian business confidence index which suggests that deterioration in the Euro-zone is slowing. Confidence will still be very fragile in the short term with markets also uneasy over weakness in the banking sector and the Euro struggled to gain support.

There was a strong rally in gold prices on Friday with the metal pushing towards the US$900 per ounce level. Unusually, for much of the day, gold strengthened in tandem with a firmer dollar trend. The rise in gold will, however act as a significant warning that dollar confidence could erode and the US currency faltered. There will be particular fears over the huge deficit financing required over the next few months. The ECRI leading index also remained at depressed levels according to the latest survey.

Any increase in tensions over the exchange rate policy would also increase the underlying dollar risk profile and the Euro pushed back to near the 1.30 level later in US trading as Wall Street looked to rally.

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International confidence remained very fragile in Asian trading on Friday. Regional stock markets weakened to six-week lows following increased fears over the technology sector and this triggered further defensive yen support.

The Bank of Japan again took a negative stance towards the economy in the latest monthly report with a warning that conditions were getting tougher. The Finance Ministry continued to protest against currency volatility and the need to avoid disruptive moves, but there was no evidence of intervention. Nevertheless, there is the risk that tensions over exchange rates will increase further which would risk destabilising markets.

As risk appetite remained low, the yen pushed back towards the 88 region against the dollar. The yen retreated in US trading as the Euro also regained ground against the Japanese currency.


Sterling remained under pressure on Friday and weakened to a fresh 23-year low near 1.35 against the dollar. Sterling also dipped to lows around 0.9470 against the Euro following the UK data.

UK GDP fell by 1.5% for the fourth quarter, the weakest performance for 28 years and this was an even steeper decline than the 1.2% expected. Retail sales rose 1.6% for December as sales volumes were boosted by retailers cutting prices aggressively. There were also additional shopping days this year which may have distorted the data.

Overall confidence in the economy will remain extremely weak in the short term, especially with budget fears increasing.

There will also be some scope for a correction from over-sold conditions, especially after a weekly decline against the dollar of close to 8% and Sterling recovered back to near 1.38 against the dollar later in US trading.

Swiss franc

The dollar pushed to fresh six-week highs above 1.17 against the franc on Friday, but then weakened back towards 1.1550 later in US trading with choppy trading conditions. The franc consolidated around 1.4950 against the Euro before drifting weaker to 1.50 as Wall Street rallied.

The franc was again unsettled to some extent by the National Bank comments earlier this week while sentiment towards European currencies in general remained very fragile which limited franc support.


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Australian dollar

Risk appetite tended to deteriorate again on Friday and this pushed the Australian currency weaker with a renewed test of support below the 0.65 level against the US dollar. The latest Australian data recorded strong export prices in the fourth quarter, but there were fears that the deteriorating global outlook would put downward pressure on commodity prices which would also undermine Australian earnings.

From lows near 0.6415, the Australian currency pushed back to 0.6570 in New York as the US currency retreated from its best levels. The surge in gold prices and a rally on Wall Street also provided some underlying support to the Australian dollar.