A better than expected U.S. ISM Manufacturing Report and a slight recovery in the stock market helped the U.S. Dollar give back some of its overnight gains in quiet trading on Monday. Traders had been buying the U.S. Dollar out of speculation that the ISM report would show the U.S. economy had weakened further. Bullish Dollar investors were caught long at the release of the report which showed the U.S. manufacturing rose to 35.6 from 32.9. While this news is positive, it does not indicate a change in trend. The increase in production was the first since June 2008.

The inability to break the equity markets following a night of heavy selling encouraged investors to increase their appetite for higher yielding assets throughout the day. This led to a closing price reversal up in the Euro and sent buyers to the Yen. The Dollar strengthened against currencies that have more serious economic issues.

The four-day short-covering rally in the British Pound appears to have run out of steam on news that trouble in the U.K. banking industry is expected to worsen. The banking system turmoil was stirred up again on Monday when Moody's cut Barclays PLC's long-term debt rating.

Last week news that Barclays would not have to tap the government bailout fund helped trigger a short-covering rally. While the negative news about Barclays came as no surprise, the timing of the debt-rating cut should be questioned. The timing of the move by Moody's comes four days before an anticipated 50 to 100 basis point rate cut by the Bank of England on February 5. Both bits of news triggered selling pressure which is likely to continue tomorrow.

The Euro recovered from an overnight selloff to close higher and post a closing price reversal up. Early in the session the Euro exhibited weakness as traders were shunning riskier assets and seeking the safety of the Dollar. All of this was taking place in anticipation of a decline in the U.S. ISM Manufacturing report. When the report showed a better than forecast number shorts covered and new buyers even stepped in to drive the Euro higher.

Despite the price improvement in the Euro compared to last week's performance, downside pressure is still anticipated as the Euro Zone economy is forecast to weaken and the European Central Bank may cut its benchmark interest rate by 50 basis points on February 5. The Euro may even give back the gains overnight as the Euro Zone Producer Price Index will be reported. Traders are looking for another decline.

Early calls are for an interest rate cut by the ECB of at least 50 basis points, however, ECB President Trichet said last week in an interview that the Euro Zone bank may refrain from cutting rates in February and cut at its more important meeting on March 5. This is adding some confusion to traders who would rather lightly trade both sides of the market than aggressively pick a side.

The trade was quiet in the USD JPY market on Monday. The Yen was higher from the start in New York as global equity markets were trading weaker overnight. Trader appetite for risk was down as traders sought the safety of the Yen. The Yen looks tentative at current levels. This is most likely due to the verbal intervention from the Bank of Japan over the past few weeks. The BoJ is under pressure from the government to curtail the rise in the Yen. A strong stock market rally would the best thing to happen to those who are bullish the USD JPY.

Falling commodity prices led by a weak crude oil market continue to put pressure on the Canadian Dollar. This currency has been in a downward spiral since last week's announcement by the Canadian government that the economy had its first budget deficit in ten years. The biggest fear is that the U.S. recession is aggressively spreading up north. Traders are now begin to price in a worse than expected unemployment report on Friday. The Canadian economy is facing the loss of more jobs. Commodity prices and key exports are falling as the Bank of Canada will have to cut rates in an effort to stimulate growth.

The USD CHF is expected to resume its uptrend over the short-term as contraction in the Swiss economy is expected to worsen. Trader uncertainty as to when and how much the Swiss National Bank will intervene has also been a bearish influence on the market. Look for more clarity once the SNB starts to make its move.

The Australian Dollar has been falling in anticipation of a 100 basis point interest rate cut by the Reserve Bank of Australia at its meeting tomorrow. Some traders feel that the cut may be as much as 150 basis points. On Monday the Australian government announced a new stimulus package plan. This plan which is modeled after a similar successful plan launched last October is expected to create more jobs and strengthen the economy.

Look for early weakness following the rate cut. Once the rate cut is out of the way, buyers may show support of the stimulus plan by aggressively buying the Aussie Dollar.

Lower commodity prices continued to weigh on the New Zealand Dollar. Traders are also watching to see what the Reserve Bank of Australia does with interest rates tomorrow. Some are speculating that the Aussie Bank will cut as much as 1.5% to keep up with the cut last week by the Reserve Bank of New Zealand. The introduction of a new stimulus plan by Australia may lead to a short-covering rally in the NZD USD. Short-term conditions are also approaching grossly oversold.

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